Closing Recap

Wednesday, September 18, 2024

The Federal Open Market Committee (FOMC) cut interest rates by an aggressive 50-bps this afternoon, leading to massive volatility for U.S. markets (big swings up/down), as the first of many expected future interest rate cuts has officially begun. What was a bit surprising given the 50%-coin flip odds of either a 25 or 50bps cut coming into the report, was that the vote for 50bps was a near unanimous 11-1 as only Fed Governor Bowman dissented in favor of a smaller 25 bps cut. In the excitement, the S&P 500 briefly hit a new all-time high at 5,689.75, passing its previous intraday high of 5,670.81, but profit taking ensued as stocks ended just off their lows of the day, snapping the S&P 7-day win streak. Interest rate sensitive stocks/sectors/assets such as gold saw sharp spikes on the news, but also slumped late in the day as the dollar spiked and stocks sank. Bond markets dropped late in the day as investors digested the Fed news, pushing yields higher.

The Federal Reserve cut interest rates by an aggressive 50-bps, the first of many expected rate cuts this year into next year (only one dissent for a 25bps cut by Bowman as 11 agreed with 50-bps cut). “The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” policymakers on the FOMC said in statement. Policymakers see the Fed’s benchmark rate falling by another 50bps by the end of this year, another 100bps in 2025, and by a final 50bps in 2026 to end in a 2.75%-3.00% range. In his speech, Fed Chair Powell said upside risks to inflation have diminished and downside risks to labor market have risen and noted the Fed remains attentive to risks on both sides of mandate. They also said will go meeting by meeting on decisions. Powell noted if the economy remains solid and inflation persists, they can dial back policy more slowly, while if the economy remains solid, the Fed can dial back pace of cuts; equally if labor market deteriorates, we can respond.

• US mortgage market index +14.2% in the latest week according to Mortgage Bankers Assoc, as the mortgage purchase index climbs 5.4%, refinance index surges 24.2% as the average 30-year mortgage rate falls 14 bps to 6.15%, lowest in two years, in Sept 13 week.

• U.S. crude stocks rose by 1.96 million barrels in the week ended Sept. 13, citing American Petroleum Institute figures while gasoline and distillates inventories also increased. The weekly EIA government data showed weekly crude stocks off 1.6M bbls to 417.51M, vs forecast of 0.5M bbl draw; gasoline stocks up 69,000 bbls to 221.62M, vs forecast of 0.2M bbl build and weekly distillate stocks up 125,000 bbls to 125.15M, vs forecast of 0.6M bbl build.
• Gold prices rose $6.20 to settle at $2,598.60 an ounce (just off recent record highs of $2,617.40). Note the contract settled prior to the FOMC rate decision. Gold future prices surged to new record highs after the FOMC rate cut before reversing in volatile trading.
• Afte some volatility post FOMC announcement, bonds slid as yields move to highs; 10-yr back above 3.7% rising +6-bps and 2-yr yield +2.7bps to 3.62%. Note interest rates have now been above the 10-year Treasury yield for the longest period since the 2008 Financial Crisis indicating tight monetary policy. During the recent hiking cycle, 30-year mortgage rates broke out a key downtrend line, rising from 2.65% to around 8% in 2023, pushing Homebuyer affordability to the lowest levels in 35 years. The dollar was lower after the rate cut, but bounced off lows to finish flat (DXY).

• In the Food Sector: GIS Q1 profit fell 14% y/y due to inflation and pressure on margins, but adj EPS of $1.07 topped the $1.06 estimate while sales fell -1% y/y to $4.85B topping the analyst estimate of $4.79B; noted Q1 gross margin fell 130 basis points to 34.8% of net sales; reaffirmed its yearly outlook. SYY shares declined following CEO comments at Wells conference saying “says Q1 industry traffic has ‘softened a bit’ vs prior quarter according to CEO; traffic in Q4 was down roughly 3% at restaurants, and the for the current quarter, that global industry traffic has "softened a bit." Commentary weighed on comps such as PFGC, USFD.

• In Lodging: Goldman Sahcs initiated HLT, MAR, and WH at Buy in Lodging sector; is sell rated on CHH, HGV and VAC and initiates Hyatt (H) and TNL at neutral noting that the backdrop for Lodging in 2024 remains choppy, with most companies lowering 2H outlooks, drawing late-cycle concerns and debate about whether the stocks are priced for perfection. That said, the firm prefers stocks with less macro-sensitive exposure (IMFs, China, O&L), and higher exposure to ancillary opportunities to drive continued EBITDA growth from here.
• In Theme Parks: Citigroup lower estimates on FUN, PRKS below street for Q3 saying following a relatively strong Q2, have been weaker in Q3. Citi said expectations for 2024 were somewhat muted coming into the year, and trends have generally been in line to slightly better than it initially anticipated. Longer term, the firm remains bullish on FUN based on potential upside to both numbers and the multiple, whereas it is more cautious on PRKS, given mounting competitive risk in the key Orlando market.

• In Truckers/Logistics: Susquehanna raised price tgts for ODFL to $225 from $210, SAIA to $585 from $550 and XPO to $160 from $145 as remain Positive rated on all in Q3 preview for LTL sector. The firm noted yes, tepid LTL volumes imply downside to 2025 consensus estimates for core LTLs. But with no LTL price war emerging, SUSQ remains constructive on XPO, ODFL, SAIA and LTL-adjacent TFII with its view of a gradual 2025 recovery. Estimates continue to come down on Wall Street for FDX ahead of earnings tomorrow (9/19) night. Bernstein said recently they are "expecting an in-line quarter, with Q1 EPS of $4.78. This is slightly below sell-side consensus.
• In Railroads (CSX, NSC, UNP): North American freight-railroad traffic rises 4.5% for the week ended Saturday, with gains in food and grains and intermodal shipments leading the way. Carloads fall 0.8% on nine reporting U.S., Canadian and Mexican railroads despite an big increases in carloads of farm products, food and grains, while the volume of intermodal units rises 9.8%, data from the Association of American Railroads shows.
• In Aerospace & Defense: LUNR shares soared after announcing NASA awarded the company the Near Space Network contract for communication and navigation services for missions in the near space region, which extends from Earth’s surface to beyond the Moon; contract has a base period of y-years with added 5-yr option and max deal value of $4.8B.
• In Metals/Steel sector: U.S. Steel (X) shares edged higher after a US security panel granted Nippon Steel Corp. permission to refile plans to purchase the steel giant, but not until after the November Presidential election. FCX, SCCO, TECK shares were active as copper prices hit two-year highs.
• In Packaging and Containers: UBS said sees Packaging as an attractive subsector on both lower estimate risk and depressed valuations. Some specific stock call outs with lower earnings and valuation risks include: AXTA, ASH, BALL, CCK, FMC, INGR, OEC, OI. On UBS’s 2H24 basis, FMC’s earnings would be above 2025 consensus.

• In REITs: NMIH upgraded to OP from Sector Perform, viewing it as one of the best ways to play the Mortgage Insurance sector. While the mortgage insurance marketplace is facing higher mortgage rates/home affordability/macro uncertainties, they view NMI as well positioned vs. peers. SLG was upgraded to Neutral from Sell at Compass Point and raised price tgt to $60 from $35. In Storage REITs, Jefferies upgraded EXR to Buy from Hold and raised tgt to $204 from $162 as anticipates peer-leading sane-store revenue growth as the company closes the 9% gap between Life Storage and Extra Space rents. is now Buy rated across all Storage REITs, with EXR and NSA as its top picks as it expects leading SS revenue from both in ’25 and ’26 (raised tgts on PSA, EXR, NSA and CUBE).

• INCY was downgraded from Buy to Hold at Truist and tgt cut to $74 from $83 saying with Jakafi patent Cliff looming Truist took a closer look to evaluate potential to offset patent loss. Truist acknowledge INCY execution on Opzelura launch & pipeline diversification & could see a robust execution playing out positively in the longer-term.
• ME shares tumbled after independent directors quit in clash with CEO over buyout plan. Co-Founder and CEO Anne Wojcicki has failed to offer an actionable plan to take the company private, directors say.
• OGN said it will acquire Dermavant, a ROIV company dedicated to developing and commercializing innovative therapeutics in immuno-dermatology, for aggregate consideration of up to approximately $1.2B, with an upfront payment of $175M and a $75M milestone payment upon regulatory approval in AD.
• MRK said the FDA approved Keytruda in combination with pemetrexed and platinum chemotherapy for the first-line treatment of adults with unresectable advanced or metastatic malignant pleural mesothelioma.
• TGTX said new BRIUMVI(R) (ublituximab-xiiy) data from the ENHANCE Phase 3b study show rapid 30-minute infusions are well tolerated in patients with relapsing forms of Multiple Sclerosis.

• In Healthcare Services: GEHC was upgraded to Buy from Neutral at BTIG with a $100 price target saying following a tough first half of 2024 where China hurt results, the setup for GE HealthCare has improved, noting the company’s guidance was reduced to effectively remove any benefit from Chinese government stimulus.
• In Life Sciences: Satorius (SOAGY) shares fell after CEO said in CNBC interview ‘We are in a year of transition,’ as Sartorius CEO Joachim Kreuzburg discusses the pharmaceutical industry and his business outlook – shares of DHR, TMO, other life sciences companies were active in reaction.

• In Media: SIRI was upgraded to Buy from Neutral at Guggenheim saying core operating trends and free cash flow remain stable, while subscriber trends are set to improve; ROKU enters into a credit agreement providing $300M five-year revolving credit facility. In cable and telecom, TMUS CEO said at a conference today they forecast 12M 5G broadband customers by 2028 and 12-15M by 2030 (comments weighed on shares of CHTR, CMCSA initially then bounced).
• In Semiconductors: SMCI initiated at new Buy and $600 tgt at Needham saying as a first mover in the design of GPU-based compute systems and liquid cooled rack level solutions, views Supermicro as a significant beneficiary from growing investment in AI infrastructure and forecast a revenue CAGR more than 55% from FY21 to FY26.