Closing Recap

Wednesday, May 31, 2023

Index	Up/Down	%	Last
DJ Industrials	-131.88	0.40%	32,910
S&P 500	-25.39	0.60%	4,180
Nasdaq	-82.14	0.63%	12,935
Russell 2000	-17.94	1.02%	1,749

 

 

 

 

 

 

 

 

 

U.S. stocks spent much of the day in negative territory, but again managed to again climb the “wall of worry” late day, paring losses across the board as equities overall took a breather (but again negative market breadth). Disappointing data from China, which showed its manufacturing sector contracting again in May and services activity growing at its slowest pace in four months, triggered a fall in global stock markets overnight, and more specifically, continued weakness in commodity related sectors (oil, copper, chemicals). Overall, it seems China’s recovery is losing momentum, and sentiment has turned much weaker on the ground. That coupled with some profit taking in technology names related to “AI” and renewed weakness in financials dominated the headlines in the morning. Lastly, the debt-limit deal is heading toward a vote Wednesday in the House of Representatives after clearing a crucial procedural hurdle with just days remaining to avoid a US default.

 

Fed commentary was mixed: Over the weekend, Federal Reserve Bank of Cleveland President Loretta Mester said she sees no "compelling" reason to wait to implement another interest rate hike, according to an interview with the Financial Times and said, "I don’t really see a compelling reason to pause.” This afternoon, Fed Governor and vice chair nominee Philip Jefferson said any decision by the Federal Reserve to hold its benchmark overnight interest rate steady at an upcoming meeting should not be taken to mean the U.S. central bank is done tightening monetary policy. Lastly, Federal Reserve Bank of Philadelphia President Patrick Harker more dovish saying that for the moment he is inclined to support a "skip" in interest rate hikes at the central bank’s next meeting in June, although economic data due soon could change his mind more dovish.

 

Bank stocks paced late morning losses after the FDIC reported that U.S. banks saw total deposits decline by a record 2.5% in the first quarter of 2023, and industry-wide profits were relatively flat after considering the effects of two large bank failures. The FDIC said the $472 billion in deposit outflows in the first quarter was primarily uninsured funds, as insured deposits rose $255.1 billion, or 2.5%, amid the failures of Silicon Valley Bank and Signature Bank.

 

US equity markets continue to climb the “wall of worry” as @KobeissiLetter notes: “Total credit card debt in the US has officially crossed $1 trillion for the first time in history. This comes as average interest rates on credit card debt have hit a record high of 25%. The average American family now holds $10,000 in credit card debt, another record. Nearly 40% of Americans now have more credit card debt than savings. Americans continue to "fight" inflation with credit card debt.” This is all while total household debt has hit a record $17.1 trillion. Mortgage debt is now at $12.0 billion while auto loans hit $1.6 trillion. This comes with record high auto loan rates and 7.1% mortgages.” @bespokeinvest notes: “AI continues to mask some major weakness in other areas of the market. 8 of 11 sectors are below their 50-DMAs. 6 of 11 sectors are oversold. Meanwhile, Tech is 10% above its 50-DMA and up 33% YTD”.

 

Economic Data

·     US JOLTS Job Openings Actual for April reported at 10.103M (second best number of 2023), above forecast 9.4M and the previous month of 9.590M.

·     Chicago Fed PMI for May reported at 40.4, well below consensus est. 47.3 and below last month 48.6 reading; posts biggest drop in US economy since April 2020 Covid shutdown.

·     China’s official manufacturing purchasing managers’ index (PMI) fell to 48.8 in May, from 49.2 in April, the National Bureau of Statistics said, and was below the 49.7 consensus estimate. It also marked the second month in a row that the reading fell below the 50-mark, which separates activity expansion from contraction.

·     The China NBS non-manufacturing PMI moderated to 54.5 in May from 56.4 in April, showing ongoing recovery in both the construction and services sectors but at a slower pace.

·     French CPI decelerated faster than expected to 5.1% YoY in May from 5.9% YoY in Apr. The MoM rate fell 0.1% from 0.6% previously. Italy’s CPI also decelerated, but not as fast as envisaged to 8.1% YoY from 8.7% YoY.

 

Commodities, Treasuries and Currencies

·     WTI crude oil futures settle at $68.09 a barrel, down $1.37, 1.97%. Broader commodity prices tumbled overnight after weaker China economic data and carried throughout the day. For the month, Nymex crude fell -11.3%. Natural gas prices continue to trend lower, falling 2.6% to finish at $2.266/MMBtu. Prices have now fallen for four straight sessions and seven of the past eight. Gold prices rose $5.00 or 0.3% to settle at $1,982.10 an ounce but overall strength in the U.S. dollar was among the reasons why prices dropped -1.8% for the month.

·     The U.S. dollar jumped vs. rivals, specifically a 2-month high vs. the Euro after data showed European inflation is cooling quicker than expected and China’s recovery is sputtering. The euro declined over -0.88% to 1.064, its lowest since mid-March, lifting the dollar index (DXY). Stronger JOLTs jobs data also boosted expectations that the Fed will continue its pace of rate hikes at the June meeting as employment trends remain strong. Recent PCE inflation data also came in “hotter” than expected, though manufacturing data has weakened significantly.

·     Treasury yields jumped initially on the economic data but slipped late afternoon to end lower, falling for a second straight day, but the 10-year rose 18.5 bps to 3.636% in May, snapping a two-month losing streak, while the two-year is up for two consecutive months, gaining 32.4 bps to settle the month at 4.388%.

 

 

Macro	Up/Down	Last
WTI Crude	-1.37	68.09
Brent	-0.88	72.66
Gold	5.00	1,982.10
EUR/USD	-0.0058	1.0676
JPY/USD	-0.53	139.26
10-Year Note	-0.061	3.635%

 

 

Sector News Breakdown

Consumer Staples & Restaurants:

·     DPZ, EL, TGT, KDP, among names making 52-week lows today.

·     In restaurants, TD Cowen with tgt changes for several names, DPZ $330 (Prior $350) FWRG $19 (Prior $18) MCD $326 (Prior $320) QSR $85 (Prior $80) SBUX $117 (Prior $120) SHAK $75 (Prior $67) and said top 4 picks: QSR, YUM, WING saying industry data suggests accelerated 2Q QTD trade down into QSR industry from fast casual & casual dining while valuations across all 3 segments are near 5-year averages which leads them to take a selective approach to the group.

·     In food space, Jefferies reviewed prior quarter saying about 80% of covered companies exceeding org. sales/EPS forecasts, while ’23 sales/EPS revisions moved up ~1%/0.5% Y/Y. While volumes declined, they still came in better than expected and pricing remained firm. Firm said they prefer BRBR on growth outlook, MDLZ on snacking exposure and LW on margin exp. due to pricing.

Retailers:

·     In auto retailers: AAP plunges as Q1 EPS $0.72 well below the est. $2.57 and Q1 revs $3.42B vs. consensus $3.43B; Q1 comp sales fell (-0.4%); slashes FY23 EPS view to $6.00-$6.50 from $10.20-$11.20 (est. $10.64), cuts FY23 revenue view to $11.2B-$11.3B from $11.4B-$11.6B, lowers FY23 comp sales growth view to (1%)-0% from 1%-3%; cuts FY operating income margin view to 5%-5.3% from 7.8%-8.2%; (follows weak results from rival AZO last week)

·     In luxury retail: CPRI top and bottom-line beat as Q4 adj EPS $0.97 vs. est. $0.94; Q1 revs $1.335B vs. est. $1.28B; but sees Q1 revs about $1.2B vs. est. $1.31B, operating margin about 8.5% and maintains 2024 op margin about 16.5%; sees 1q Michael Kors revs about $775M vs. est. $860.2M.

·     In sporting goods: SPWH posts wider Q1 loss and a miss on revs while comp sales fell (-17.8%); guides 2Q net sales $310-340Mm vs est. $344.79Mm, comps -17% to -9%, and adj EPS $0.02-0.15 below the consensus estimate of $0.20.

·     In mattress retail (TPX, SNBR, PRPL), Wedbush said initial Memorial Day selling period mattress checks with retailers and industry contacts indicate a wide range of performance, and it estimate that industry-wide brick-and-mortar sales declined MSD. While some may view this as disappointing given easy comparisons against last year’s holiday period sales declines, Wedbush looks positively on the fact that nearly all its contacts indicated improving y/y sales trends relative to April as weather effects dissipated and the shock of banking concerns subsided.

 

Homebuilders, Building Products, Home Furnishing:

·     In Housing, RDFN said Real estate investors purchased 48.6% fewer homes in Q1 than they did a year earlier as elevated interest rates along with declining rents and housing values ate into potential profits; that’s the largest annual decline on record and outpaced the 40.7% drop in overall home purchases in the 40 major metros tracked by Redfin. Investor purchases fell 15.9% on a q/q basis, comparable with the 14.7% quarterly drop in overall home purchases.

·     In flooring: LL shares rallied after confirmed late yesterday that it has received an unsolicited, non-binding proposal from Cabinets to Go, LLC., a subsidiary of F9 Brands, Inc., to acquire all of the outstanding shares of the Company for $5.76 per share in cash.

·     U.S. Mortgage bankers Assoc said its weekly mortgage market index fell -3.7% in week ended May 26 as the purchase index falls -2.5% and refinance index falls -6.9% as the average 30-year mortgage rate rises 22 bps to 6.91% in May 26 week.

 

Energy

·     Oil prices tumbled again ahead of OPEC+ meeting this week, as China’s economic recovery weakened in May, raising fresh fears about the growth outlook.

·     Berkshire Hathaway (BRKA) increased its stake in OXY to about 25% over the past week as an SEC filing showed the company bought 4.66 million shares of OXY between May 25-30, at prices ranging from $58.30-$58.85 a share, roughly $275M in all.

·     In research: CVX was upgraded from Underweight to Neutral at JPMorgan and raised tgt to $170 from $161 saying the co has shown solid execution in recent years, maintaining a stable production profile on lower levels of CAPEX than the past, leading to healthy FCF generation.

·     In Solar: Wells Fargo said recent Web traffic suggests near-term residential solar permit strength and based on their analysis, estimate Q2 & Q3 US installations could beat consensus; seen as a positive for RUN, NOVA, SPWR. SHEL said it acquired 12 solar projects in Spain with a total capacity of 1.1 gigawatt from renewables developer Isemaren.

 

Financials

Banks, Brokers, Asset Managers:

·     Banking stocks came under pressure mid-morning (KRE, BKX) after the FDIC said it added four banks to its ‘problem bank list,’ now stands at 43 firms worth a total of $58B (didn’t list the banks); said growth in noninterest income, accounting treatment of failed bank acquisitions, and record trading revenue at large banks contributed to bank profits; unrealized losses on securities fell 16.5% in q1 2023 to $515.5 bln; deposit outflows have ‘moderated’ since end of Q1; Total deposits fell a record 2.5% in q1 2023, but insured deposits rose 2.5%. Regional banks saw the sharpest pullbacks late in the morning (CMA, CFG, ZION, TFC, FITB). MS shares slid late day after saying at an investor conference it expects its revenue from trading and investment banking to slump in the second quarter.

·     In lending/services; SOFI rises for the 6th time in 7-days, recall yesterday, BTIG said re the debt ceiling details "federal student loan payments are expected to begin again this fall, which should be viewed as directionally positive for SoFi Technologies and possibly lead generation platforms as there could be increased demand for student loan refinancing."

 

Transports, Industrials & Materials

Transports

·     In car rental, CAR was upgraded from Hold to Buy at Deutsche Bank and raised tgt to $263 from $239 saying while primarily valuation-centric remains its central call, it also sees a potential catalyst in the form of a likely return to share repurchases in the back half of the year.

·     In airlines, AAL boosted its Q2 adj EPS outlook to $1.45-$1.65, from prior $1.20-$1.40 and said Revenue per available seat mile is now expected to fall 1% to 3% from the same quarter last year, compared with prior guidance for a drop of 2% to 4%.

·     In rails (CSX, UNP, NSC), The Association of American Railroads reported total U.S. weekly rail traffic was 480,998 carloads and intermodal units, down 4.8% compared with the same week last year. Total carloads for the week ending May 27 were 235,307 carloads, up 3.5% compared with the same week in 2022, while U.S. weekly intermodal volume was 245,691 containers and trailers, down 11.6% compared to 2022.

·     In tankers: the Baltic exchange’s main sea freight index recorded its first monthly decline in four amid weakness in shipping rates across all segments. The overall index, which factors in rates for Capesize, Panamax and Supramax shipping vessels, fell 146 points, or 13.0%, to its lowest since Feb. 27 at 977. The main index was down 38% for the month, its biggest drop since January.

·     In defense: GE CEO Culp said during the Bernstein Conference that supply-chain problems affecting the company’s aerospace business are expected to persist until the latter part of 2024; shares of LHX touched a 52-week low.

 

Materials, Metals & Mining

·     Industrial metal weakness continues as copper prices dip back near 6-month lows (FCX, SCCO, TECK); prices of the metal are set to close May down ~6% after losing 4.4% in April; weakness in industrial metals comes after China PMI data showed manufacturing contracted in May and the service sector expanding at its slowest pace in four months. Data also showed factory output declining in Japan and South Korea.

·     In chemicals: Keybanc notes in chemicals that caustic soda falls $35/ton in May, seen as negative for likes of OLN, WLK

·     In Metals: EGO falls after the company announces strategic investment and concurrent bought deal financing; TECK shares volatile after Bloomberg reported that GLNCY is working on a potential improvement to its bid for Teck and could announce it as soon as the coming weeks. Notes TECK has rebuffed Glencore’s $22.5 billion offer to combine the two companies and is instead pursuing plans to separate its copper and coal business. https://tinyurl.com/5cam6dvy

 

Technology

Hardware & Software movers:

·     AAPL said its App Store generated $1.1 trillion in sales last year, according to an Analysis Group report that was funded by Apple. The report found that App Store sales have doubled since 2019, when they reached $519 billion.

·     BOX reported upside to Q1 billings, Q1 & FY24 margins and Q2 rev/margin guidance were somewhat offset by incremental headwinds from FX & macro impacts in EMEA / SMB, combining to slightly lower reported FY24 rev & billings growth.

·     HPE Q2 results disappointed on the top line as North American Enterprise customers pulled back on data center spend; lowered its constant-currency FY23 growth guide to +4%-6% (from +5%-7%), reflecting weaker Compute demand.

·     HPQ mixed Q2 results as missed rev forecast but beat EPS by 2c on record gross margins; Personal Systems revs declined 29% y/y (25% y/y in CC) on weakness in both consumer and commercial segments. Total units declined 28% but gained share in the commercial market.

·     TWLO rose after the Information reported that activist investor Legion Partners had met with the company’s board of directors and managers to suggest changes to the board.

·     VERI withdraws Q2 and full-year forecast after AMZN said it will reduce consumption of VERI’s human resources products and services, effective mid-May through at least July; co said the decision will reduce Q2 revenue by $4M-$5M.

 

Semiconductors:

·     INTC shares popped following guidance at conference; said forecasts Q2 revenue at the upper end of its guidance and said it’s not seeing any near-term weakness associated with any sort of upside from GPUs.

·     NVDA pulled back below the $400 level a day after being the first chip company to post a market cap of over $1 trillion in a mass move built around the hope of “AI” growth.

·     AMBA reported In-line Apr Q1 revs of $62.1M, roughly in-line with the midpoint of the company’s previously issued guidance range, while guides Q3 revs $60M-$64M below est. $67.2M; sees Q2 gross margin 62.5%-64.5%; sees Q2 operating expenses $48M-$50M.