Closing Recap

Thursday, March 02, 2023

Equity Market Recap

·     Stocks finish higher, erasing earlier losses as the market remains resilient despite several negative economic data points and rising Treasury yields for several days. The S&P was again at an important technical support level, and once again “held the line” rebounding off its 200-day moving average (3,940 for SPX), pushing higher into the close. Signs that inflationary pressures could be here to stay has not impacted stocks deeply to this point, nor the fact that higher rate hikes, to the possible tune of another 50-75bps by the Fed, will hurt sentiment. The Dow Jones Industrial Average outperformed behind strength in Salesforce (CRM) earnings results. Some media outlets cited comments by Fed’s Bostic mid-afternoon for the market lift off, but comments were in-line with prior Fed commentary. Reality is, markets were holding up well all day prior, and the path of least resistance today was to the upside!

·     Bottom line, it was another buy the dip kinda day on Wall Street! On a day that saw jobless claims hold below 200K jobs, unit labor costs double estimates/triple last month figures, nonfarm productivity fell from last month and Treasury yield extend spike – markets still found solid footing at key levels, rallying this afternoon. Treasury yields rose with the 10-yr hitting highs of 4.08% (best since Nov) and 2-yr at 4.9% (highest since 2007), but still didn’t matter. Fed speakers have been overly “hawkish” with comments about higher rate outlooks, giving markets a clear view that rates will be “higher for longer” yet major averages have managed losses well. The S&P 500 is still up around 3% this year despite the broader narrative changing.

·     In a few signs of caution: @LizAnnSonders noted “Insiders dip out … ~450 executives scooped up shares last month but more than 4X as many sold … makes for highest ratio of sellers vs. buyers since April 2021 per Washington Service”. Note in the current situation for stocks markets into today: S&P 500 down 250+ points in a month, Inflation is back on the rise again (CPI, PPI, PCE all rose last 2-weeks), 10-year note yield above 4.00% for first time since Nov 2022, mortgage demand at a fresh 28-year low, and fed fund futures showing rates rising as high as 6.0%. The US dollar index fresh pop above 105 and stocks teetering at key technical supports (SPX 50-day 3,982, 200-day MA 3,939, and 100-dayu MA 3,922). @knowledge_vital notes: “It is still incredibly impressive that stocks aren’t down even more given what yields have done – this is the most bullish thing about the market (if the enormous repricing in yields over the last month failed to crush stocks, what happens if/when data cools and Tsys rally?)

Economic Data:

·     Weekly Jobless Claims fell to 190K in the latest week as the jobs market remains strong, below consensus 195K and down from 192K last week; the 4-week moving average rose to 193K from 191,250 prior week and continued claims fell to 1.655M from 1.66M.

·     Nonfarm Productivity for Q4 rose +1.7% vs. +2.6% consensus and below prior 3%; average productivity slid 1.7% in 2022 from a year earlier, marking the largest annual slump in the measure since 1974. Unit labor costs meanwhile nearly tripled from prior reading to 3.2% (from 1.1%) and was double the estimate of 1.6%.

Commodities, Currencies and Treasuries

·     Oil prices pared early gains on Thursday as signs of a strong economic rebound in top crude importer China were offset by fears over the impact of potential increases to European interest rates, but prices close higher as U.S. crude oil futures settle at $78.16/bbl, up 47 cents, 0.60%. Gold prices fell -$4.90 or 0.4% to settle at $1,840.50 an ounce, pulling back after a three-session advance. Commodity prices have risen in recent days after better China economic data.

·     Treasury yields continued to climb on Thursday, boosted by another round of strong jobs data and rising inflation concerns as Q4 unit labor costs more than double estimates. The 10-yr yield hit highs of 4.09%, its highest since November), while the 2-yr yield trades above 4.9%, its highest since 2007. Data over the last week reinforces the view that the U.S. Federal Reserve will need to raise interest rates more than Wall Street has forecasted to cool the economy. Euro zone inflation numbers this week have also supported expectations that interest rates would go higher and stay there for longer. On the long end, 30-year bond yields broke above 4%. The probability that the Fed’s policy rate, currently set in the 4.5% to 4.75% range, could go up to a 5%-5.25% range this month stood at about 34%, up from about 30% on Wednesday.

Sector News Breakdown

Consumer

·     Apparel and Department Store Retailers: AEO topped analysts’ estimates for quarterly revenue at $1.5B, said it expects full-year revenue to be in the range of flat to up low-single digits (est. +3.2%) and said Q4 sales and profit margins were tracking at the high end of its forecasts; Macy’s (M) mixed as Q4 better, FY EPS guide is not as light as peers, but Q1 is way below (at $0.42-$0.48 vs. est. $0.82) – guided full year profit $3.67-$4.11 vs. est. $3.84, but sales weaker as sees 2023 sales $23.7B-$24.2B vs. est. $24.29B; BURL Q4 EPS beats $2.96 vs. $2.70) on better revs ($2.74B vs. $2.6B) and comps (-2%) better than (-6.4% est.); JWN results tonight.

·     Specialty apparel: FNKO shares tumble after Q4 earnings miss, below-consensus guidance as sees Q1 revs $225M-$255M vs. est. $295.6M on unexpected EPS loss vs. est. $0.06. BKE reported net sales for February of $82.5 million vs. $87.9 million y/y. electronic retailer BBY Q4 top and bottom line beat estimates but same-store sales fell -9.3% missing expectations and guided FY24 EPS $5.70-$6.50 on revs $43.8B-$45.2B below est. $6.72/$45.69B; warehouse retailer COST to report tonight; discount retailer BIG 4Q comp -13% while EPS better, 1Q comp guide down L-M teens (a little worse), and no EPS guide given.

·     In autos: TSLA shares fall -5% following its Investor Day commentary which included Tesla saying they could need to spend nearly $150 billion more (including $28B already spent) to achieve its long-term goals, which includes selling 20 million vehicles a year. CEO Elon Musk commented on sustainable energy but didn’t offer any specifics on new products or service. Ford (F) said US Feb. 2023 sales 157,606, +21.9% y/y.

·     Consumer Staples: In beverages: BUD reported a fall of 0.6% in total volumes, missing analysts’ expectations of a 2.1% increase though revs rose 10.2% to $14.67 billion, supported by higher selling prices, while net profit rose to $2.84 billion from $1.96 billion in 2021; in food: HRL Q1 sales of $3B misses the $3.1B estimate on weaker EPS (40c vs. 45c) and guides FY GAAP EPS of $1.70 to $1.82 (vs. prior $1.83-$1.93) and below est. of $1.89warning profit to be pressured by supply chain inefficiencies related to higher inventory levels and softness in snack nuts category; UTZ FY23 outlook shows net sales growth of 3% to 5% (est. 4.3%), organic net sales growth of 4% to 6% (est. 4.6%), and adj. EBITDA growth of 6% to 10% (est. 9.0%). Grocers KR and SFM both reported earning that came in above views, with shares jumping for both.

Energy, Industrials and Materials

·     Aerospace & Defense: AXON downgraded to Neutral from Overweight at JPMorgan as expect AXON to perform in line with our coverage universe over the next six to twelve months. Lufthansa said it would order 22 latest-generation long-haul aircraft with a total list price of $7.5 billion; deal includes 10 Airbus A350-1000s, five Airbus A350-900s and seven Boeing 787-9s. AER shares rally early following quarterly results.

·     In Industrials: HVAC companies positive mention at TD Cowen saying they continue to have Buys on all HVAC stocks though admittingly Q1 data points are a bit mixed; firm still favors TT, CARR, LII and JCI in that order and don’t expect anyone to raise ‘23 numbers this Quarter. Bernstein notes the Architecture Billing Index declined by 3% Y/Y in Jan. vs. -6% in November and said they remain cautious on this end market and view URI as the best way to express a negative view.

·     Materials and Metals: MP shares declined after Tesla Inc says its next generation electric vehicles (EV) would not use rare earth metals; industrials and materials were among S&P leaders, rising a second day after upbeat economic data out of China boosted interest in those sectors. Gold miners were a little lower after the dollar and Treasury yields rose, weighing on sentiment.

Financials

·     Banks: crypto bank SI shares fell initially after saying it is working diligently to file 10-k as soon as possible but does not expect to be in position to file by extension date of March 16. BX defaults on €531mCMBS after property sales delayed, Bloomberg reported. COIN says it cut financial ties with SI and said it had minimal exposure to the lender, whose latest filing raised questions about its ability to stay in business. Banks overall among the hardest hit S&P sectors on the day amid fears of rising interest rates. SBNY shares fell in sympathy with SI, trading at 52-week lows. SBNY on Thursday announced filing of its 2022 10-K and noted its digital asset deposits totaled $17.79 bln, or 20% of total deposits as of Dec 31. In Insurance, PFG shares slide after late yest forecast 2023 Principal Global Investors (PGI) rev decline in range of 1-5% vs long-term target of 4-7% growth while it expects Principal International revenue growth of 7-11% for 2023.

Healthcare

·     Biotech movers: NTLA announces FDA clearance of investigational new drug (IND) application for NTLA-2002, an in Vivo CRISPR-based investigational therapy for the treatment of hereditary angioedema; MOR said to stops work and operations on pre-clinical research programs and reduces workforce at its Germany Headquarters. In Healthcare Services: CANO shares tumble after providing a 2023 revenue forecast that fell short of estimates; Q4 EPS loss (-$0.61) vs. est. loss (-$0.13); and sees 2023 total revs $3.1B-$3.25B vs. est. $3.27B. CDNA shares tumbled after a new billing and coding document related to molecular testing for solid organ allograft rejection, "at first blush" appears "clearly negative" said Stephens. In diabetes sector, DXCM shares advanced as CMS releases new coverage guidelines for such devices for patients under gov’t-backed insurance plans. Among other changes, new guidelines removed the requirement for frequent dosing of insulin and frequent adjustment of diabetes treatment regimen, while allowing Medicare-approved telehealth for initial provision of CGM, thereby expanding access.

Technology, Media & Telecom

·     Software: Dow component CRM shares surge on big Q4 beat and much stronger guidance and hikes its share buyback plan to $20B; sees 2024 adj EPS $7.12-$7.14 vs. est. $5.78 and revs $34.5B-$34.7B vs. est. $34.05B; Cloud player SNOW reported wider Q4 EPS loss, but adj tops views on better revs, and announces $2B buyback, but guided Q1 revs $568M-$573M below consensus $582M. In security software, OKTA 4Q adj EPS $0.30/$510Mm revs top vs est. $0.09/$489.4Mm on higher Q1 guidance, lifting shares. SPLK delivered a 4Q ARR beat, a bigger revenue beat on long-duration term licenses, guiding ahead on FY24 FCF and margins, and guiding a bit cautiously on ARR; DV reported strong Q4 results, with total revenue coming in ahead of consensus and adj. EBITDA above both consensus and the upper end of the guidance range; VEEV results were above consensus on key metrics. F1Q24 and FY24 (Jan) guidance was below consensus revenue/EBITDA.

·     In semiconductors: shares of silicon carbide (SiC) players such as ON, STM, WOLF tumble after Tesla set out plans to significantly reduce the use of silicon carbide in its next generation of powertrains; co said "we’ve figured out a way to use 75% less without compromising the performance or the efficiency of the car." CRDO reported in-line JanQ at $54.3M and guided its AprQ in line with its recent 8-K at ~ $31M. ON downgraded to MP from OP at Raymond James as sees opportunities elsewhere in analog semis due to near-term headwinds from overhead absorption and strategic business exits and valuation above historical levels.

·     Hardware & Components: BOX delivered solid 4Q results, but lower-than-expected revenue guidance reflecting ongoing FX and seat expansion pressure weighed on shares; PSTG shares fell as guides Q1 revs $560M, below analysts’ expectations of $605.5M saying current macro uncertainties will continue to persist, creating headwinds to enterprise IT spending." WSJ reported that AAPL has delayed the approval of an email-app update with AI-powered language tools over concerns that it could generate inappropriate content for children.