Closing Recap

Wednesday, September 21, 2022

Equity Market Recap

·     Volatile action this afternoon as stocks finished at the lows (with big swings in between) as “higher interest rates for longer” was the message delivered by the Fed today after raising rates by another 75-bps (their 3^rd straight 75-bps hike), a message that was not well received by investors and stock markets. The Dot Plot update was also massive as 12 out of 19 FOMC members expect Fed Funds between 4.50% and 5.0% by the end of 2023 (basically eliminating any hopes of a Fed pivot sometime next year – no rate cuts). Treasury yields surged following the data, with the 2-yr jumping as high as 4.1% and the 10-yr at 3.64% initially on the report (but slid after). The dollar also hit multi-year highs vs. several rival currencies on the headlines. While Wednesday’s decision was unanimous, the dot plot shows 10-9 majority in favor of hiking above 4.25% this year, suggesting a fourth straight 75 basis-point increase in November is possible (which would be into the mid-term elections). Powell also warned of housing recession, saying in some of his final remarks that “we have to go through a correction to get back to normal price growth.” Much to digest for markets, investors, economists, and strategists overnight as to what the further hawkish statement means for markets. A rough day for major averages overall as the Fed appears resolute on their fight against inflation, with Powell again reiterating that not bringing down inflation would bring far greater pain for markets.

FOMC Meeting Highlights:

·     The Federal Reserve raised its target interest rate by 75-bps points to a range of 3.00%-3.25% and signaled more large increases to come in new projections showing its policy rate rising to 4.40% by the end of this year before topping out at 4.60% in 2023 to battle strong inflation.

·     The U.S. central bank’s quarterly economic projections, meanwhile, showed the economy slowing to a crawl in 2022, with year-end growth at 0.2%, rising to 1.2% in 2023, well below the economy’s potential. The unemployment rate is projected to rise to 3.8% this year and 4.4% in 2023. Inflation is seen slowly returning to the Fed’s 2% target in 2025.

·     Fed officials’ median view of Fed funds rate at end-2022 4.4% vs 3.4% in June projection; Fed officials’ median view of Fed funds rate at end-2023 4.6% (prev 3.8%); Fed officials’ median view of Fed funds rate at end-2024 3.9% (prev 3.4%); Fed officials’ median view of Fed funds rate at end-2025 2.9%; Fed officials’ median view of Fed funds rate in longer run 2.5% (prev 2.5%).

·     Fed officials see year-end U.S. Jobless rate at 3.8% in 2022 (prev 3.7%); 4.4% in 2023 (prev 3.9%); 4.4% in 2024 (prev 4.1%); 4.3% in 2025; long-run at 4.0% (prev 4.0%); Fed officials see PCE inflation at 5.4% in 2022 (prev 5.2%); 2.8% in 2023 (prev 2.6%); 2.3% in 2024 (prev 2.2%); 2.0% in 2025; long-run at 2.0% (prev 2.0%); Fed officials see GDP growth at 0.2% in 2022 (prev 1.7%); 1.2% in 2023 (prev 1.7%); 1.7% in 2024 (prev 1.9%); 1.8% in 2025; long-run at 1.8% (prev 1.8%).

Economic Data

·     Existing Home Sales for August reported -0.4% at 4.80M unit rate vs. consensus 4.70M and vs. July 4.82M; Aug inventory of homes for sale 1.28M units, 3.2 months’ worth; Aug national median home price for existing homes $389,500, +7.7% from Aug 2021

Commodities, Currencies & Treasuries

·     Oil prices fall as WTI crude settles at $82.94/bbl, down $1.00, 1.19% and Brent crude futures settle at $89.83/bbl, down 79 cents, 0.87%. The outlook for rising rates provided by the Fed today with no signs of stopping anytime soon weighed on the demand outlook for oil and other commodity prices as the dollar jumped.

·     Gold prices edge higher +4.60 or 0.3% to settle at $1,675.70 an ounce, getting a boost on the Putin comments, offsetting the surge in the US dollar ahead of the Fed (DXY holding above 111). Gold dropped quickly after the hawkish view from the text of the Fed statement, only to reverse higher in volatile trading.

·     Treasury yields were near the highs of the day heading into the FOMC rate decision and press conference (10-yr 3.57% and 2-yr 3.99%) after the 2-year hit highest since 2007 at 4% earlier (and now roughly 45 bps yield inversion for 2s and 10s). Yields jumped even further following the Fed statement as the 10-yr topped 4.1% and the 10-yr 3.64% (but moved lower after).

·     The dollar index (DXY) was at fresh 20-year highs above 111 heading into the Fed meeting and prices extended gains, rising to 111.63 initially before profit taking ensued; the dollar rises above 1.34 vs. the Canadian dollar (2-yr highs); The euro extended losses vs dollar, hits fresh two-decade low, down 1.5% at $0.9827 before paring losses in a volatile afternoon.

Sector News Breakdown

Consumer

·     Retailers: SFIX with disappointing Q4 results, coming in well below guidance as 4Q adj EBITDA ($31.8Mm) vs est. ($30Mm) on revs $481.9Mm vs est. $489Mm, while active clients -9% y/y to 3,795,000 and guides 1Q net revs $455-465Mm vs est. $522.7Mm; OXM was upgraded to Neutral from Sell at Citigroup saying while continue to see risk to margins longer-term, it is unclear when this will materialize, as business remains remarkably strong

·     Housing & Building Products; earnings tonight in homebuilders with KBH and LEN expected to report results; Mortgage applications in the US increased 3.8% in the week ended September 16th, the first rise in six weeks, and the biggest in three months according to weekly Mortgage bankers Assoc data (refinancing index rises 10.4% despite the average 30-year mortgage rate rising 24 bps to 6.25%, highest since oct 2008; in home improvement retail (HD, LOW, TSCO), Truist said higher interest rates are slowing housing turnover and moderating home price appreciation rates. However, the home improvement sector is driven by the existing ~128mm homes in the US, not the ~5mm that are sold every year.

·     Consumer Staples: GIS boosted its FY23 sales and profit forecast – sees organic net sales to rise between 6%-7% in fiscal 2023 above its previous expectation of 4%-5% growth and FY23 adj profit to rise 2%-5% on a c/c basis vs prior view of flat-3%, reflecting higher prices; COTY said it’s on track to double its skincare sales to $500M-$600M by FY25, while raises Q1 LFL sales growth view to 8%-9% from 6%-8%; EL upgraded to Buy from Neutral at Goldman Sachs following the recent pullback in the stock saying uncertainty around the duration of China’s zero-Covid policy and the associated impact on EL’s business remains high, but appears adequately reflected in the stock; BYND suspended its COO after allegedly biting man’s nose; NAPA tgt cut to $18 from $24 and ests lowered at Bank America ahead of earnings on lower wine sales estimates

·     Casinos, Gaming, Lodging & Leisure sector: in online travel, Deutsche Bank said according to AirDNA, they are looking for 3Q GBV of between $16.6-$17.6B, between ~$1.4B-$2.4B ahead of consensus for ABNB; cruise, online travel, gaming among biggest drags in the S&P 500 early – EXPE, LVS, DAL, HLT all lower initially; in Auto sector: FREY positive mention at Morgan Stanley calling it their top IRA Beneficiary Top Pick with new $26 tgt rating and Bull case rating at $60 saying new $26 PT assumes 182 GWh by 2035, a 23% revenue CAGR (2025-2035), an 18% exit EBITDA margin, and a 0% execution discount

·     Restaurants: CMG tgt raised to $1,950 from $1,850 at Cowen saying they walked away from mgmt meetings with greater confidence in Chipotle’s ability to gain share near-term despite a cautious outlook across the sector given the industry wide fast casual slowdown in June and July

Energy

·     Inventory data mixed: The EIA said weekly Crude inventories rose +1.142MM barrels, vs. expected +2.20MM build; Gasoline stockpiles rose +1.570 barrels, Distillate +1.230MM and Cushing while production 12.1MMb/d, unchanged – SPR drain a record 8.4MM as Biden admin drains almost 2MM in oil per day to keep gas prices low. The America Petroleum Institute said weekly crude oil stockpiles rose 1.035M barrels, with Cushing inventories rising 510K barrels, gasoline inventories jumping 3.225M barrels and distillates with a 1.53M barrel build

·     Refiners: DINO was downgraded to Equal Weight at Wells Fargo and lower tgt to $55 from $62 mostly due to its lesser exposure to the Atlantic Basin distillate market this winter season while saying VLO, PSX and PBF possess the most Atlantic Basin distillate exposure (MPC and DK relatively less) which supports our OW ratings; PBF upgraded from Neutral to Overweight at JPMorgan with $43 tgt saying while PBF has been the top performer in the refining group YTD, shares have traded off ~32% since peak and believe current levels are highly attractive given improvements in the company’s balance sheet

Financials

·     Bank & Brokers: Citigroup (C) said it is winding down its retail banking business in the United Kingdom, as the U.S. lender attempts to streamline its international operations; AJG downgraded to Neutral at Piper as don’t see any further catalysts for higher valuation in the near term; in asset managers, (PRU, VOYA, AMP), Piper noted according to Morningstar Direct, August long-term AUM decreased 3% M/M to $23.4T from $24.2T in July; JPM CEO Dimon says Ukraine and China pose greatest vulnerability for U.S. Financial stability

·     FinTech & Payments; SQ was downgraded to Neutral at SMBC Nikko saying while continue to believe SQ is one of the highest quality long-term names under coverage, lowers rating on hard-to-quantify, but material crypto exposure, lack of medium-term visibility, and uncertainty around the potential impact of SQ’s more conservative investment strategy on medium-term growth; PYPL was added to US 1 list at Bank America and removed Visa (V)

Healthcare

·     Pharma movers: ADMP shares tumble after ending a Phase 2/3 study of its Tempol drug candidate in high-risk patients with early Covid-19 infection after an interim analysis showed the trial didn’t meet its key goal.; ALPN offered 13.6M shares at $7.35, in-line with stock’s last sale; PCRX shares slide following topline data from phase 3 study of Exparel as a single-dose sciatic nerve block in the popliteal fossa for bunionectomy

·     Healthcare Services & MedTech Equipment; Bank America noted that for Life Sciences & Diagnostic Tools names (TMO, DHR, MTD, WAT, QGEN), they feel markets are solid, but ’23 Street estimates may still be too high as see ~3% downside risk to consensus 2023 EPS across the group; CHNG announced that it has declared a one-time special dividend of $2.00 in cash per each issued and outstanding share of common stock of the Company.

Industrials & Materials

·     Aerospace & Defense: US defense stocks NOC, LMT, RTX, LHX were higher early after Russian President Vladimir Putin declared a partial mobilization with the Kremlin also moving to annex occupied regions of Ukraine; Jefferies said they continue to prefer TDG and HEI in aerospace supply sector given leverage to the commercial AM recovery and operating leverage supporting high EPS growth

·     Transports, Industrial & Machinery: The U.S. Environmental Protection Agency (EPA) will consider adopting more stringent greenhouse gas emissions rules for heavy trucks after Congress passed new incentives to speed the adoption of zero-emission vehicles, the agency told Reuters (CMI, CAT among names possibly leverage to news); GWW reaffirms guidance and provides strategic update at its investor day

·     Metals & Mining: industrial metals (copper, aluminum, etc.) seeing broad weakness on slowing global demand fears/recession concerns, while a surging dollar also weighs on prices; AA mentioned cautiously by Credit Suisse, cutting ests and tgt to $50 from $63 saying the aluminum company faces tough Q3 due to operational challenges, higher energy costs, and lower aluminum prices on the benchmark London Metal Exchange over the quarter

·     Materials & Paper: GLT suspended the Company’s quarterly cash dividend as part of its focused efforts to optimize the operational and financial results of the business; cautious comments on CCK at Deutsche Bank saying given Nielsen trends, they see downside risk to Crown’s (CCK) volume Target this year of 5% – 6% growth in North America

·     Chemicals: CC the latest in a strong of chemical related companies to issue lower guidance as sees FY adj EBITDA $1.40B-$1.45B, below its prior view of $1.48B-$1.58B saying its titanium tech segment outlook drove the outlook; Ag chemicals (CF, NTR, MOS) were stronger early on reports of re-escalation of Ukraine/Russia conflict, raising concerns once again about grain supplies

Technology, Media & Telecom

·     Media, Internet: social media/ Internet names mostly lower; LYV named a new best “short” idea at Hedgeye saying demand for events is likely to deteriorate after a strong summer/fall season and sees potential for 30% downside over next 6-12 months; WMG named departing YouTube business chief Robert Kyncl as its next chief executive

·     Semiconductors: MU weak initially after several broker’s express caution: Mizuho downgraded to Neutral from Buy and cut tgt to $56 from $75 saying recent checks show steepening price declines into DecQ and 1H23; Wells Fargo reduces ests saying set-up into upcoming (9/29) F4Q22 results appears very negative, as DRAM and NAND industry fundamentals continue to weaken, and Stifel initiated at Hold rating with $56 tgt; WDC was downgraded to Neutral from Buy and tgt cut to $40 from $62 at Mizuho (2^nd analyst cut this week after Deutsche Bank cut Tuesday)

·     Software movers: French industrial group Schneider Electric (SBGSY) said it would proceed with a full takeover of British software company Aveva Plc (AVVYY), offering 31 pounds per share in a deal valuing the whole of Aveva at around 9.48 billion pounds ($10.8 billion); TTWO said that a hacker had gained access to the help desk platform of its unit 2K Games and sent a malicious link to certain customers

·     Hardware, Components & Services: ANET upgraded to Overweight at Barclays on a strong demand outlook while downgrading CSCO on competition and macro headwinds; CSCO’s move to software-based model has been sluggish, w/ peers seemingly growing faster despite similar backlog profiles; co is also more vulnerable to macro, enterprise risks; for ANET, says mid-teens growth rate should be sustainable for a few more years