Mid-Morning Look

Thursday, April 06, 2023

U.S. stocks open lower following additional signs of a slowing U.S. economy and rising recession risks after weaker jobs headlines, weighing on industrials, materials, and tech early, while defensive utilities and healthcare outperform a second day in what is expected to be a light volume day into the 3-day holiday weekend. Financials seeing buying strength early, both large cap and regional, ahead of earnings season kick off late next week (JPM reports next Friday) and two weeks after. Meanwhile, after months of stronger labor markets, things changed dramatically this week with one negative data point after another, as markets battles the rampant rise in interest rates from an aggressive Fed trying to contain inflation. We had already seen softer JOLTs and ADP numbers this week, but an elevated jobless claims report this morning, adjusted sharply higher and a sharp spike in continued claims adding to the fear. Treasury yields are steady after declining six-consecutive days coming into Thursday, with the 10-yr down at 3.29% and the 2-yr 3.77% as bond and stock trades continue to bet that the Fed will pause at the May meeting, followed by subsequent rate cuts later in 2023. The Reserve Bank of India kept its key policy rate unchanged at 6.5% – marks the third Central bank to pause rates (joins Australia and Canada). Markets are banking the FOMC will follow suit despite the hawkish tilt they continue to push on markets. Stocks pare losses on the open as major averages remain in tight range to start the day.

Economic Data

·     Weekly Jobless Claims fell to 228K, above consensus of 198K, but prior week was upwardly revised to 246K from 198K,000; the 4-week moving average fell to 237,750 from 242,000 prior week; continued claims spike to 1.823M vs. est. 1.699M (prior week revised higher to 1.817M from 1.689M); insured unemployment rate unchanged at 1.3%.

·     U.S. Challenger announced job cuts rose 11.9k to 89.7k in March, rebounding from the -25.2k decline to 77.8k in February. Compared to last March, planned job cuts are up 319.4% y/y versus the 410.1% y/y rate in February.

Sector Movers Today

·     In aerospace & defense: Wells Fargo previews the quarter, saying they prefer BA, TDG, CACI as think A&D could hold up better than broader industrials into Q1 results, given less exposure to recession concerns. EADSY CEO signed agreements to open a new assembly line in China, doubling its capacity in the world’s second-largest aviation market, while formalizing earlier orders for passenger jets. AL said aircraft investments in quarter totaled about $1.4 bln; as of March 31, Co’s fleet had 437 owned aircraft, 86 managed aircraft. HEI named favorite aftermarket stocks for exposure to aerospace recovery at RBC Capital, though continue to remain cautious on the planned production rate increases for Boeing, and risks around the long-term outlook for demand in China remains a focus.

·     In chemicals: RPM reported top and bottom line Q3 beat EPS ($0.37 vs est. $0.30) and topline ($1.52B vs. est. $1.47B) but guided 4Q to flat sales vs consensus up 2% and adj EBIT flat to down HSD vs consensus up 4% noting volumes declined but grew in businesses benefitting from increase infrastructure and reshoring spend (SHW moved). In ag chemicals, MOS downgraded to Neutral at JPMorgan and cut tgt to $46 from $60 due to lower expected future projected cash balances due to a likely faster than expected rate of earnings deceleration.

·     In beverages: STZ reported Q4 EPS $1.98/$1.99B in sales vs. est. $1.82/$2.02B, raises dividend and guides 2024 EPS $11.70-$12.00 vs. est. $11.68 saying beer sales beat internal targets, while the wine and spirits business expanded operating margins. Bernstein noted for U.S. beer category (STZ ), March volumes were very weak as U.S. beer/FMB/cider posted a -2.3% volume decline for the 12-weeks to 25-Mar-23 (-4.9% 4wk YoY) in Nielsen. Positive price-mix of +6.3% (+5.6% for 4wk trailing) led to +3.9% 12wk trailing value growth (+0.5% for 4wk trailing).

Stock GAINERS

·     AMC +13%; and APE shares slide after a U.S. court denied the Co’s request to lift a status quo order, which was necessary to proceed with the conversion of the company’s preferred stock into common shares.

·     CMA +3%; upgraded at JPMorgan, while regional and large cap banks see early strength (ZION, FITB, USB, SCHW among early S&P leaders).

·     FDX +1%; adds to yesterday gains on positive analyst comments; upgraded to Outperform at Raymond James as believe undeniable change is afoot post the company’s recent DRIVE event.

·     LW +4%; reported Q3 top and bottom line above consensus and raised FY23 adj EPS view to $4.35-$4.50 from $3.75-$4.00 and revs view to $5.25B-$5.35B from $4.8B-$4.9B.

·     STZ +1%; reported Q4 EPS $1.98/$1.99B in sales vs. est. $1.82/$2.02B, raises dividend and guides 2024 EPS $11.70-$12.00 vs. est. $11.68 saying beer sales beat internal targets, while the wine and spirits business expanded operating margins.

Stock LAGGARDS

·     BKE -2%; reports March comps decline of (-10.1%) and net sales decline of (-9.2%) to $113.4M.

·     COST -2%; said March total comps fell (-1.1%), with U.S. comps down (-1.5%), Canada (-2.4%), other International +2.0%; e-Commerce comp sales fell (-12.7%); overall March comps ex gas/FX +2.6%, U.S. +0.9%, Canada +7.6%.

·     LEVI -15%; beats Q1 revenue and profit estimates on strong demand for its jeans and non-denim outfits, but gross margin of 55.8% in Q1 was 360 bps below the record level of 59.4% y/y.

·     LITE -9%; cuts Q3 revs to $380M-$384M from $430M-$460M vs. consensus of $444.15M saying it experienced order cancellations “due to customer Inventory management” which represented more than 10% of their 2Q revenue; shares of COHU, CIEN, FN, MTSI decline in sympathy.

·     MOS -3%; downgraded to Neutral at JPMorgan and cut tgt to $46 from $60 due to lower expected future projected cash balances due to a likely faster than expected rate of earnings deceleration.

·     RPM -4%; reported top and bottom line Q3 beat EPS ($0.37 vs est. $0.30) and topline ($1.52B vs. est. $1.47B) but guided 4Q to flat sales vs consensus up 2% and adj EBIT flat to down HSD vs consensus up 4%