Mid-Morning Look

Wednesday, March 15, 2023

U.S. stocks slide with the Dow, the S&P 500 and the Nasdaq all falling over 1% amid weakness in financials, energy, materials and industrials. Weakness in Credit Suisse drags down U.S. bank stocks early, raising fears of a fresh banking crisis. Even a softer inflation reading (PPI) for February, coming in well below consensus views/prior month figures and weaker manufacturing and retail sales data failed to stem concerns. The softer PPI, weaker retail data, along with the recent banking market concerns after SIVB/SBNY banks were closed this past week has now boosted expectations that the Fed will hold rates steady next week (down from prior view of 50-bps hike just last week), and now calls for terminal rate to fall by year end, with several rate cuts anticipated late 2023. Interest rates futures also now price 60% chance of ECB raising rates by 25 bps on Thursday. The volatility in the Treasury market remains astounding as two-year yield plunge as much as 54 basis points to 3.71% (and off highs around 5.09% last week – 138bps). Note the yield curve inversion between 2s and 10s narrows to about -40bps, from roughly -110bps just 5-days ago – incredible volatility in bonds. WTI oil drops below $68 a barrel for first time since Dec. 2021 amid heightened risk aversion. Dow Transports underperform for a second day, falling below its 200-day MA support last 2-days of 13,900 amid broad sector weakness.

Economic Data

·     PPI inflation lower than ests and prior month. Headline February producer price index (PPI) fell -0.1% vs. expected +0.3% m/m (after +0.7% in Jan) and y/y prices rise +4.6% vs. economist views +5.4% (vs. last month +6.0%). On a core basis, or excluding food & energy, PPI was flat vs. expected rise +0.4% (vs. +0.5% in Jan) and rose +4.4% vs. estimate +5.2% y/y (vs. +5.4% in Jan).

·     Retail Sales for Feb reported at (-0.4%) vs. consensus (-0.3%) and down from January +3.2%; Feb Retail Sales Ex-autos fell (-0.1%) vs. est. (-0.1%) and January +2.4%; Feb Retail Sales Ex-autos/gasoline unchanged vs Jan +2.8% (prev +2.6%).

·     NY Fed’s empire state current business conditions index tumbles -24.6 in March vs -5.8 in February as new orders index -21.7 in March vs -7.8 in February, prices paid index +41.9 in March vs +45.0 in February, employment index at -10.1 in March vs -6.6 in February and six-month business conditions index +2.9 in March vs +14.7 in February.

·     U.S. March NAHB Housing market index 44 versus 42 in February; current single-family home sales 49 versus revised 47 in February (previous 46); index of home sales over next six months 47 versus 48 in February; index of prospective buyers 31 versus revised 28 in February (previous 29).

Sector Movers Today

·     Credit cards: Rising net charge offs (NCOs) and delinquency payments in credit card sector after monthly data, a cautious sign that consumers falling behind on payments: COF reported charge-offs for February of 4.16% vs. 2.19% y/y; February Delinquencies 3.72% vs. 2.51% y/y; a sharp spike from prior month. DFS February net charge-offs (NCOs) 3.4% vs. 2.02% y/y, while delinquencies 2.74% vs. 1.79% y/y; Loans at end-February $89.6b vs $73.1b y/y. JPM credit card charge-off rate 1.33% in Feb vs 1.17% in Jan and credit card delinquency rate 0.88% at Feb end vs 0.83% at Jan end. SYF said loan delinquencies was at 3.9% in February, compared with 3.8% in January and 2.9% a year ago. Net charge-offs were 4.7% in February, up from 4.2% in January and from 2.8% y/y; loan receivables were $90.7B in February, down 0.9% from $91.5B in January.

·     In metals: STLD guides Q1 EPS $3.47-$3.51 vs. est. $3.10 saying sees 1Q profitability from steel and recycling operations meaningfully stronger than 4Q and raised its dividend; prior to the guidance, Citigroup had downgraded STLD to Neutral saying they were structurally bullish on steel but sees short-term headwinds. In aluminum, AA shares fall after co’s Australia unit to cut Portland aluminium smelter output to 75% capacity. Precious metal stocks rise, led by gold miners along with spike in gold on rotation into haven assets (AEM, NEM, GDXU, GOLD).

·     Homebuilders get a bump higher as LEN earnings beat with Q1 adj EPS $2.12 vs. est. $1.55; Q1 revs rose 4.6% y/y to $6.49B vs. est. $5.99B; Net new orders fell -9.9% y/y to 14,194 but above views; qtrly deliveries increased 9% to 13,659 homes (also helping builders a sharp drop in Treasury yields and rate expectations, lowering mortgage rates – as well as sharp decline in commodity costs with steel, copper, aluminum names falling).

Stock GAINERS

·     CMS +1%; as defensive utilities outperform given drop in yields, sector rotation.

·     LEN +2%; Q1 adj EPS $2.12 vs. est. $1.55; Q1 revs rose 4.6% y/y to $6.49B vs. est. $5.99B; Net new orders fell -9.9% y/y to 14,194 but above views; qtrly deliveries increased 9% to 13,659 homes.

·     OTLY +3%; Q4 revenue rises 4.9% to $195.1M, topping ests for $181.5M and forecasts annual revenue growth largely above Wall Street expectations, as sees full-year revenue growth of 23% to 28% compared with analysts’ average estimate of a 25.10%.

·     S +4%; reported 4Q results with non-GAAP EPS of ($0.13) (consensus ($0.16)) on revenue of $126.1M (consensus $124.7.0M), up 92% y/y, marking the sixth consecutive quarter of over 25% y/ y operating margin expansion.

·     SMAR +9%; January quarter results beat consensus estimates across the board despite a macro that continues to weaken for the company while FY24 billings and revenue guides came in moderately below expectations.

Stock LAGGARDS

·     CS -17%; shares hit a new record low and 5-yr credit default swaps (CDS) hit record highs after the Swiss bank’s top shareholder Saudi National Bank ruled out investing more.

·     FRC -15%; after a brief bounce on Monday and Tuesday, regional bank shares back under significant pressure on capital/liquidity concerns given the fallout from SVB Bank and SBNY closures this week; had rating cut to “junk” by S&P this morning (weakness across the board in

·     GES -7%; after results Q4 top and bottom line beat but sees 1Q revs -7% to -6% vs est. +3.8%, op mgn -1.2% to -0.5%, adj EPS ($0.31)-($0.25) vs est. $0.52; guides FY revs +1-3% vs est. +3.9%;

·     HAL -7%; energy the worst S&P sector this morning as oil prices drops below $70 a barrel for first time since Dec. 2021, slides below $68 amid heightened risk aversion (SLB, MRO, DVN slide).

·     STLD -7%; issues quarterly guidance, but overall commodity sector pressured on slowing demand fears given banking turmoil and impact on economy (AA, FCX shares fall).

·     SYF -6%; said loan delinquencies was at 3.9% in February, compared with 3.8% in January and 2.9% a year ago. Net charge-offs were 4.7% in February, up from 4.2% in Jan and from 2.8% y/y.