Closing Recap

Wednesday, November 30, 2022

Equity Market Recap

·     Off to the races! Stocks were in holding pattern most of the day, with investors shaking off a broad batch of mixed economic data points earlier (GDP, ADP, Chicago PMI), only to surge following comments from Fed Chairman Jerome Powell mid-afternoon. The S&P 500 jumped 140 points from lows to high (topping its 200-day MA of 4,050 for first time since April), and the Nasdaq rose over 500 points after Powell, speaking on the economic outlook, inflation, and the labor market at the Hutchins Center on Fiscal and Monetary Policy at Brookings said it makes sense to moderate pace of interest rate hikes and that the time to moderate pace of rate hikes may come as soon as December meeting. Powell noted in prepared text the Fed has made substantial progress toward ‘sufficiently restrictive’ policy, have more ground to cover. Futures tied to Fed policy rate imply about 75% chance of a 50-bps rate hike December, vs. 25% chance of a 75-bps hike following Powell’s comments today. Still substantial rate hikes expected, but not doing an unprecedented 75-bps hike for a 5^th meeting in a row was enough to boost markets (for now). U.S. interest-rate futures prices point to peak fed policy rate next year of just under 5% by May 2023. Treasurys received a bid, with yields pulling back from levels ahead of the remarks. An incredible move to cap the day that earlier saw mixed data: Chicago PMI huge miss, GDP reading slightly better (but inflation readings edged higher), weaker housing data and JOLTs, while ADP private payrolls rose less than estimates. Treasury yields fell with the 10-yr at 3.7%, down from 3,79% prior to Powell. Another big night of tech earnings with CRM, SNOW, SPLK, NTNX, PSTG, OKTA, BOX tonight. With today’s rally, the Dow and S&P ended the month with a 4% advance (back-to-back monthly advances for both for the first time this year), while the Nasdaq rises nearly 3% this month. Tomorrow has key inflation data and jobs results on Friday which could extend the market rally or put a quick end to it depending on results.

Economic Data:

·     U.S. 3Q prelim GDP +2.9% vs consensus +2.7% and previous +2.6%; but inflation readings a bit higher than expected with GDP Price deflator for Q3-P +4.3% vs. est. +4.1% and core PCE Prices prelim +4.6% vs. est. +4.5%; consumer spending +1.7% from 1.4% prior; Q3 business investment +5.1% (vs. prior +3.7%); equipment +10.7% (vs. prior +10.8%)

·     Chicago PMI a huge drop, falling to 37.2 from 45.2 the prior month and well below the economist estimate of 47.0; prices paid rose at a slower pace; signaling expansion while new orders fell at a faster pace; signaling contraction

·     November ADP Jobs Report: +127K vs. 200K consensus and +239K in October; Goods-producing jobs up 86,000, service-providing jobs up 213,000

·     October goods trade deficit moved higher to $99 billion vs. $90.6 billion est. & $91.9 billion in prior month (rev from $92.2 billion)

·     Pending home sales drop for fifth straight month in October as October Pending Home Sales fell -4.6% M/M to 77.1 vs. -5.0% consensus and -8.7% in September (revised from -10.2%)

·     US Job Openings (JOLTs) fell to 10.33mln in Oct. from 10.69mln

·     US mortgage market index falls 0.8% in latest week says the MBA as mortgage purchase index rises 3.8%, refinancing index falls 12.9% despite the average 30-year mortgage rate falling 18 bps to 6.49%

Commodities, Treasuries and Currencies

·     Oil prices rose with WTI crude $2.35 or 3.01% to settle at $80.55 per barrel, boosted by signs of tighter supply, a weaker dollar and optimism over a Chinese demand recovery (but fell -6.9% for the month). Overnight, the U.S. Energy Sec advisor Hochstein said the White House has changed its plan to replenish oil reserves between $67 and $72. Instead, they will only buy once oil prices were ‘consistently’ at $70 per barrel. Inventory data on the day was very bullish with a massive -10M barrel draw for crude. OPEC+ meets on Sunday and is expected to keep oil output policy unchanged, though there is a small chance that a production cut might be considered. Natural gas prices fall 4.2% to close the session at $6.930/MMBtu on weather and rail strike news.

·     Gold prices for February settlement fell -$3.80 or 0.2% to finish at $1,759.90 an ounce, but prices ended 7.3% higher for the month, their first monthly rise in eight months. The U.S. dollar eased from a one-week high and extended losses late day following “dovish” commentary of a speech by Federal Reserve Chair Jerome Powell, sliding over 4% in November, its biggest monthly loss since late 2010.

·     The yield on the 10-year U.S. Treasury note was 3.714%, down from 3.746% Tuesday as bonds rallied following Fed Chairman Powell comments this afternoon. Powell clarified why he thinks it’s a good idea to slow the pace of interest-rate increases which is what markets grabbed on to. Because monetary policy works with lags, he noted that officials would likely raise rates too high He also reiterated that officials think inflation pressures can be reduced through big declines in job openings rather than large increases in unemployment.

Sector News Breakdown

Consumer

·     Retailers: AMZN said customers bought record number of products in five days from Thanksgiving to Cyber Monday; Wayfair (W) said it recorded a low single-digit sales increase in the U.S. over the same period last year; said November revenue trends strengthened relative to the lower quarter-to-date trends it previously disclosed; BBW posted higher sales and earnings for Q3 as revs rose 10% to $104.5M while raised its full-year sales guidance to $455M-$465M from $440M-$460M; pool company LESL issued FY23 EPS and sales below consensus $1.56B-$1.64B vs. est. $1.65B saying inflation, rising interest rates and other macroeconomic factors could weigh; FL says CFO Page to step down after Q4 earnings report; WOOF reported higher third-quarter sales and earnings that met analyst expectations.

·     Auto sector: TSLA retail sales in China also nearly doubled in November from a year earlier, according to data from China Merchants Bank International; Retail sales for BYD Co Ltd. totaled 152,863 vehicles from Nov. 1 to Nov. 27, logging a nearly 83% increase in average daily sales; XPEV surged on broader China stock strength despite warning that its vehicle deliveries could more than halve in the current three-month period and reported a wider loss for Q3 due to a rise in expenses; at Evercore/ISI, FSR initiated outperform with $15 target, 107% upside, LCID initiated in line with $12 target, 23% upside and RIVN initiated in line with $35 target, 21% upside; CVNA downgraded to neutral at Bank America saying without fresh financing “liquidity will dry up” and the equity value will fall to zero

·     Restaurants & Consumer Staples: HRL Q4 EPS $0.51 vs. est. $0.50; Q4 revs $3.3B vs. est. $3.38B; Q4 operating margin 11.2%; Sees FY net sales $12.6B-$12.9B vs. est. $13.01B and EPS $1.83-$1.93 vs. $2.01; CTVA to acquire Stoller Group for $1.2B in cash; ULTA rises head of earnings tomorrow in the beauty space with EL and COTY showing relative strength

Energy

·     Energy stock movers: U.S. crude oil inventories dove -12.6M barrels in the November 25 week, according to the EIA, after sliding -3.7 M barrels previously – more than 4x the forecast and is largest draw since June 2019. Gasoline stocks rose 2.8M barrels after rising 3.1 M previously. And distillates were up 3.6M after the prior 1.7M gain. API Oil Inventories show crude stockpiles fell -7.85M barrels vs -2.8Mm expected, while Cushing fell -150k barrels, Gasoline rose +2.85M barrels and distillates +4.01M

·     E&P and Majors: Reuters reported Eni is in preliminary talks to buy private-equity backed gas and oil producer Neptune Energy for around $5-$6 billion, adding that no official bid had been submitted; Tudor Pickering downgraded AR, CTRA and EQT to Hold, moving to the sidelines as 2023 and 1H’24 fundamentals remain challenging – continue to see significant downside risk to strip as supply far outstrips demand until H2’24 when new LNG capacity starts to ramp.

·     Utilities & Solar: UBS initiated coverage of water utilities SJW with a Buy rating, CWT at Neutral, and AWR at Sell saying the sector has attractive characteristics for a defensive market environment (7% EPS growth potential, significant investment opportunities from pipe replacement and water access, limited short-term refinancing risk); ED was upgraded to Neutral from Underperform citing substantial updates to the outlook this year

Financials

·     Bank movers: STT announced that it has mutually agreed with Brown Brothers Harriman & Co. (BBH) to terminate State Street’s proposed acquisition of BBH’s Investor Services business; LPLA downgraded to equal-weight at Morgan Stanley and removed from its ‘Financials’ Finest’ list, with private-equity group BX; HSBC will close 114 bank branches across the UK from next April in the face of declining footfall; in Financial Services & Insurance: INTU Q1 adj EPS and revs topped consensus but guides Q2 revs approx +8-9% vs est. +14.5% and adj EPS $1.41-1.45 vs est. $2.06 on lower year guidance

Healthcare

·     Pharma movers: HZNP shares jumped after the company’s board confirmed that it is engaged in highly preliminary discussions with AMGN, JNJ’s Janssen Global Services, and SNY which may or may not lead to an offer being made for the entire share capital of the Company; ARGX announced an agreement to acquire a U.S. FDA Priority Review Voucher (PRV) for $102M. A PRV entitles the holder to FDA priority review of a single Biologics License Application, which reduces the Target review period and may lead to an expedited approval (BLUE is the seller of the PRV); BHC designated 1261229 B.C. Ltd., the entity that directly or indirectly holds 88.7% of the issued and outstanding shares of Bausch + Lomb Corporation, as an unrestricted subsidiary of the Company in accordance with the terms of the Company’s debt documents

·     Biotech movers: Eisai Co. and BIIB’s Alzheimer’s drug, called lecanemab, slowed cognitive decline by 27% compared with a placebo over 18 months in a study of more than 1,700 people with early-stage Alzheimer’s, according to the New England Journal of Medicine on Tuesday, but many had brain bleeds, swelling or other side effects; XFOR shares active following management’s disclosure of statistically significant and clinically meaningful results from the P3 4WHIM trial evaluating Mavorixafor in WHIM syndrome patients (Stifel said believe weakness is likely balance sheet driven); AGLE falls after naming a new CEO and delaying a release of clinical data

·     MedTech Equipment: ISRG tgt raised to $300 from $260 at Stifel saying management has highlighted the growth contribution from thoracic surgery; LUNG receives Japanese MHLW Approval; in Healthcare Services, CI reaffirms FY adjusted EPS of at least $23.10 vs consensus $23.16

Industrials & Materials

·     Aerospace & Defense: BA edges higher after U.S. Senate Commerce Committee chair Maria Cantwell drafts proposal granting exceptions for Co’s two MAX variants if they include safety enhancements; AJRD spiked after Reuters reported GE and LHX are among those competing to acquire rocket maker AJRD while saying TXT and private equity firm Veritas Capital are also vying to acquire the company which has a market value of about $4 billion

·     Transports, Industrial & Machinery: TITN hits record highs following quarterly results; China Manufacturing PMI for November was weaker-than-expected at 48.0 vs 49.2 prior and non-Manufacturing was also soft at 46.7 vs 48.7 prior; MMM CEO said at CSFB conference today its consumer-facing businesses are seeing incremental weakness in their markets; still guiding $750 mln-$850 mln impact from inflation this year; general industrials slipped early on day

·     Transports: in shipping, the Baltic Dry overall index, which factors in rates for Capesize, Panamax and Supramax shipping vessels carrying dry bulk commodities, rose 28 points, or about 2.1%, to 1,355, its highest level in 3-weeks; XPO was downgraded to neutral from Buy (reinstated lower) saying while valuation remains compelling, think macro headwinds will likely dampen tonnage growth; for rails (CSX, UNP, NSC), the House voted to approve a measure ending a rail workers’ labor dispute ahead of a possible strike

·     Metals & Materials: CMP reported F4Q22 adj. EBITDA of $35.0M vs. est. $34.9M as volumes came in ahead of Stifel expectations for both Salt & Plant Nutrition, while margins came in below expectations; NTR downgraded to Neutral from Overweight at Piper Sandler and cut price tgt to $93 from $115 citing recent Q3 earnings miss and a cut in guidance; MEOH downgraded to Sector Perform from Outperform at RBC Capital as see rising recessionary uncertainties and the potential for lower methanol prices in 2023

Technology, Media & Telecom

·     Software movers: Internet security software stocks slide after CRWD new subscriptions slightly missing estimates, ARR grew 54% to $2.34B vs est. 2.35B and sees 4q adj EPS $0.42-$0.45 vs. est. $0.34 and revs $619.1M-$628.2M below est. $634.8M citing macroeconomic headwinds and elongated sales cycles with smaller customers (OKTA, FTNT, PFPT, ZS, QLYS slide); WDAY raised its outlook and launched a $500M share buyback program, revs rose to $1.6B from $1.33B in the year-ago quarter, while subscription revenue rose 22% to $1.43B from a year ago

·     Hardware, Components & Services: Last night China officially lifted the lockdown on Zhengzhou, also known commonly as iPhone city with Foxconn’s main AAPL production artery located in this key area. Wedbush noted this is some good news in what has been a horror show for Apple around iPhone production, which has been operating at roughly 20%-30% of capacity there; NTAP posts mixed Q2 with EPS beat and rev miss, but shares fall on lower Q3 guide and cuts FY23 EPS view to $5.30-$5.50 from $5.40-$5.60 (est. $5.52) and cuts FY23 rev growth to 2%-4% from 6%-8%; HPE posts Q4 revs of $7.9B topping the estimate of $7.42B, helped by sustained demand from its edge-to-cloud portfolio and guided Q1 revs $7.2B-$7.6B vs. est. $7B