Closing Recap

Thursday, October 03, 2024

U.S. stocks struggled to find direction on Thursday, ending down on the day as traders kept tabs on the risk of escalating conflict in the Middle East and the ongoing dockworkers strike on the East Coast, while preparing for the crucial monthly labor market report due Friday. Trading was very choppy ahead of the September nonfarm payroll report where economists are forecasting a 140k increase in September payrolls following gains of 142k in August, 89k in July, and 118k in June. The unemployment rate is expected to hold steady at 4.2%, versus a 33-month high of 4.3% in July. Oil and gas stocks were in focus after President Joe Biden told reporters he was “discussing” if he would support Israel striking Iran’s oil facilities, sending WTI crude higher by over 5%. The dollar advanced again this week, rising to 6-week highs while Treasury yields bounced on data. Among top sector movers today included transports, falling below key support levels led by airlines and shipping; weakness in apparel retail after LEVI lowered its year sales forecast; strength in nuclear/uranium stocks after Nikkei reported that Alphabet is considering tapping the carbon-free source for its power needs; strength in energy stocks as oil prices jumped on Middle Eastern increased conflict between Iran/Israel. The biggest sector declines were Consumer Discretionary, Materials, REITs, Consumer Staples, and Healthcare all down over -0.9% while Technology and Energy were higher. Stocks moved sideways all afternoon ahead of the jobs report.

Investors will continue to track oil producers as geopolitical unrest persists in the Middle but the other big story is the potential impact of the ongoing 45,000 members of the International Longshoremen’s Association strike, closing ports on the East and Gulf coasts. The WSJ reported, citing S&P Global, that many importers and manufacturers pulled forward orders to try to get ahead of the East Coast port strike now under way; if not resolved soon, the strike could eventually affect the shipping of 40-50% of U.S. imports; disruptions would surely put upward pressure on goods prices and in turn complicate the Fed’s ambition to wind down its fight against inflation; higher shipping costs to the East Coast in anticipation of the strike have already contributed an inflationary impulse. Also, Goldman Sachs noted: The 14 largest ports affected by the strike collectively handle 25% of US goods imports and 27% of goods exports, which are worth 2.8% and 1.9% of US GDP, respectively. If the strike lasts for only a short period of time, the effects on net exports and inventories would be roughly offsetting, resulting in little net effect on GDP growth. A longer strike may force domestic producers to scale back production, resulting in a larger drag on GDP growth.

Payroll preview: the September Nonfarm payroll report expected tomorrow 8:30 AM with est. 140K (prior 142K), private payrolls 125K (prior 118K) and manufacturing payrolls (-5k) vs. prior (-24K); unemployment rate expected to hold at 4.2% and average earnings m/m to rise +0.3% and rise +3.8% y/y.

• ISM Non-manufacturing sector shows PMI rises to 54.9 in September vs. consensus 51.7 and vs 51.5 in August, as the non-manufacturing business activity index 59.9 in september vs 53.3 in August, prices paid index 59.4 vs 57.3 in August, new orders index 59.4 vs 53.0 prior and employment index 48.1 vs 50.2 in August.
• S&P Global September final composite PMI at 54.0 (vs flash 54.4) and U.S. S&P Global September final services PMI at 55.2 (vs flash 55.4).
• U.S. Aug factory orders declined -0.2% vs. consensus unchanged and vs July +4.9%; Factory orders ex-transportation -0.1% vs July +0.3% (prev +0.4%), U.S. Aug factory orders ex-defense -0.4% vs July +4.9% and U.S. Aug Durables orders unrevised at unchanged. Aug nondurables orders -0.5% vs July +0.6%.

• Separately, OPEC oil output fell in September to its lowest this year, a Reuters survey found on Thursday, as unrest disrupted Libyan supply and Iraq made progress in complying with its cutbacks pledged to the wider OPEC+ alliance. OPEC pumped 26.14 million barrels per day last month, down 390,000 bpd from August’s revised total, the survey found, with Libya accounting for the bulk of the drop.
• Dec gold prices rise $9.50 to settle at $2,678.20 an ounce despite the dollar bounce. Yesterday the yen fell sharply against the dollar following comments from Japan’s Prime Minister Shigeru Ishiba, who said conditions weren’t right for the Bank of Japan to move again following two interest rate hikes earlier this year (rose again today around 147 level, highest since late August). Today, the British Pound slides over -1.1% to 1.3116 against the dollar after Bank of England Governor Andrew Bailey said the Central bank could be more aggressive in cutting borrowing costs if inflation remained benign. The dollar ended at 6-week highs.
• U.S. Treasury yields climbed after strong ISM services sector data supported forecasts for a smaller interest rate cut at the Fed’s November meeting than in September. U.S. services sector activity jumped to a 1-1/2-year high in September, accelerating to its highest level since February 2023, according to the Institute for Supply Management (ISM)’s non-manufacturing purchasing managers (PMI) index. The U.S. 10-year yield climbed to their highest since Sept. 3 last up around 3.82%.

• In Food/Grocery: Tesco (TSCDY) raised its FY25 profit guidance to around 2.9 billion pounds ($3.85 billion) compared with the previous target of at least 2.8 billion pounds saying price cuts boosted sales volumes in the first half; Revenue rose to 34.77 billion pounds from 33.80 billion pounds, which compares with expectations of 34.74 billion pounds. In beverages, spirits maker STZ reported Q2 EPS $4.32 vs. est. $4.08 on mostly in-line revs $2.92B saying in quarter beer business achieved solid 6% net sales increase primarily driven by 4.6% climb in shipment volumes; beer business continues to expect net sales growth of 6-8% & operating income growth outlook of 11-12% for fiscal 2025.
• In Consumer Staples: in tobacco, BTI was double downgraded to Underweight from OW at Morgan Stanley with a $33 price target saying they are more skeptical on the company’s next-generation-product growth and no longer sees benefiting near-term from transitioning smokers, given the lack of regulatory enforcement against e-cigarettes.

• In Autos: STLA was downgraded from Overweight to Equal Weight at Barclays noting the automaker warned big on US (but also much weaker EU/RoW) on Monday 30 Sep and firm now performs full model reset to incorporate US market share/pricing/inventory situation and EU market share erosion/launch delays. CVNA price tgt raised to $195 from $125 at Citigroup and keeps a Neutral rating on the shares saying retail unit tracking data suggests Carvana’s Q3 unit sales are tracking 2% above consensus at 107,800 units. The analyst increased unit and EBITDA projections for Q3 and beyond to reflect Carvana’s strengthening retail unit demand, growing.

• Heavy Duty trucking (CMI, PCAR): Class 8 preliminary truck September orders were 37,100 — up 126% month-over-month and relatively flat year-over-year on a preliminary basis. September Class 8 orders increased well above ACT’s seasonally elevated expectations as OEMs open the order books for next year. ACT believes that vocational trucks were most of the Class 8 orders said Truist.
• Nuclear Energy names (SMR, NNE, VST, NRG) among early movers higher after a report in the Nikkei said GOOGL is considering how to bring electricity from nuclear power plants to its data centers, following comments from CEO Sundar Pichai, as the co searches for ways to meet the huge energy demands of its artificial intelligence projects. Shares of uranium names (CCJ, UUUU, URA also active on news). https://tinyurl.com/2724pbay
• In Transports: Sector was weaker as the Dow Transportation Index briefly dropped below its 50dma support of 15,770 to lows 15,759.91 before paring losses; shares of airline DAL were weaker, ahead of its earnings next week on Thursday 10/10 – the first major transport to report for Q4.
• In Chemicals: NGVT shares dropped after President and CEO, John Fortson, has left the maker of specialty chemicals and carbon materials, and that it has appointed Luis Fernandez-Moreno as interim President and CEO.
• In Energy: EQT was upgraded to Buy at Citigroup saying the energy markets appear at a crossroads – oil fundamentals appear set to weaken (albeit with persistent geopolitical risk) while the U.S. gas market appears set to tighten in 2025 and Citi thinks low-cost producers stand to be winners within Energy and upgrade EQT to Buy. HLX shares popped after Bloomberg reported late morning the company was exploring options, including a sale.

• In Banks: Warren Buffett’s Berkshire Hathaway (BRK) sold another 8.5M shares of BAC between Sept. 30 and Oct. 2 valued at $338M, the 13th round of share sale since mid-July. Berkshire has so far sold 238.7N BAC shares since mid-July for $9.75B (still owns about 10% stake as per filing).

• In Telehealth: HIMS shares slipped after the FDA said LLY’s obesity and diabetes drugs are no longer in shortage. HIMS had taken advantage of shortages in Lilly and rival NVO drugs to develop copycat treatments, as sanctioned by the FDA. The removal of the LLY drug from its shortage list means production of copycat versions are not permitted.
• In CPAP/Med devices: Stat News noted many analysts see GLP-1 drugs, which have shown positive results in treating sleep apnea, as a threat to CPAP companies. But RMD, which makes sleep apnea devices, sees an opportunity. The device maker has started presenting data suggesting GLP-1 users are more likely to go on to use CPAP eventually.
• In Pharma: VRCA was downgraded from Buy to Hold at Needham saying expects the significant downsizing of VRCA’s sales footprint will be headwind for Ycanth growth. The departure of key C-suite executives in charge of the two most important functions (commercial and financial) at VRCA in this current situation is concerning. GILD said it would donate about 5,000 vials of its antiviral drug remdesivir to the Rwanda Medical Supply for emergency use in response to the Marburg virus outbreak.

• In Internet: GOOGL teams in recent months have made progress on AI reasoning models, like OpenAI’s o1 according to Bloomberg. Since OpenAI unveiled its o1 model, known internally as Strawberry, in mid-September, some in DeepMind have been concerned that the company had fallen behind.
• In Media: LYV shares fell as judge denies request to move antitrust suit to Washington DC

• Semiconductor sector (SOX) rallied on Wednesday back to 5,100 and added to gains again Thursday.
• NVDA shares jumped after a CNBC interview last night as Jensen Huang, Nvidia CEO, says that "Blackwell is in full production" and that "everything is on track."
• WOLF shares fell after Mizuho downgraded to underperform as it sees slower Global EV sales in 2H24E and 2025E, with IHS now estimating EVs up ~6% y/y in 2024E (down from up ~33% y/y in January), and it sees 2025E up only ~10% y/y (below IHS up ~40% y/y); and increasing China SiC supply up another 50-100% y/y in 2025E.