Mid-Morning Look

Thursday, September 19, 2024

Massive strength across high beta/interest rate sensitive sectors as Wall Street cheers the Fed big rate cut the day prior! Stock market futures soared overnight to new record highs for the S&P 500 and Dow Jones Industrials as traders react to the first Fed rate cut since March 2020. Defensive sectors such as Utilities (XLU) and REITs (XLRE) seeing early weakness while investors rotate into Technology (XLK up over 2%), Energy (XLE), Consumer Discretionary (XLY), Materials (XLB) and Industrials (XLI). So, what is driving global stock markets higher exactly? Well, the FOMC lowered the target range for the fed funds rate by 50bps to 4.75-5.00% at its September meeting on Wednesday. The post-meeting statement was updated to say that the FOMC was “strongly committed to supporting maximum employment” alongside the 2% inflation target and that the risks to the Committee’s dual-mandate goals were “roughly in balance.”  The median dot plot showed 50bp more cuts in 2024 to a fed funds rate of 4.375%, 100bp of cuts in 2025 to 3.375%, and 50bp of cuts in 2026 to 2.875%, which is the median participant’s estimate of the neutral rate! Bottom line, big cut now, more big cuts coming, and stock market investors excited for lower rates, lower borrowing costs, and hopes inflation doesn’t spark higher again. Despite fed fund futures going into yesterday rate cut news showing a greater chance of 5-bps cut vs. 25bps, it still took Wall Street economists by surprise as @DiMartinoBooth noted “NINE (only TWO from big banks) of 114 economists surveyed forecast a 50-bps cut, which rising bankruptcies tell us was needed. Powell DEFIED 95 banks that were positioned to profit from a 25-bps cut.”

In other central bank news today, the Bank of England said it would hold interest rates steady following its initial cut in August, even after the U.S. Federal Reserve opted for a jumbo rate cut the day before. The Monetary Policy Committee voted by 8 to 1 to hold, with the dissenting member voting for a 25-bps cut. A “gradual approach” to monetary easing remained appropriate, with services inflation remaining “elevated,” the committee said. The U.K. economy, which has returned to growth but been sluggish this year, is expected to return to an underlying pace of around 0.3% per quarter in the second half, it added. The British Pound surges to 30-month-high after Bank Of England holds rates steady.

The 10-yr yield bounces as much as 5bps to highs around 3.77%, up 17bps in 2 days, despite the Fed rate cut. Bitcoin prices jump as investors look to riskier assets, rising over 5% and topping $63K earlier. The U.S. dollar surprisingly bouncing despite the Fed actions, with dollar index (DXY) +0.45% above 101. After hitting new record highs, gold prices dipped slightly back below $2.600 an ounce after a massive run into the Fed meeting yesterday.

• August Existing Home Sales reported at 3.86M unit rate, down -2.5% vs. consensus 3.90M vs July 3.96M (prev 3.95M); Aug inventory of homes for sale 1.35M units, 4.2 months’ worth; the August national median home price for existing homes $416,700, +3.1% from Aug 2023.
• The Philadelphia Fed factory index rose to 1.7, slightly above consensus est. 0.0, while Fed prices-paid index 34.0 vs 24.0, Fed employment index at 10.7 vs -5.7, prices-received at 24.6 vs 13.7, new orders index at -1.5 vs 14.6.
• The Q2 current account balance (-$266.8B) vs. consensus (-$260.0B) and vs Q1 balance (-$241.0B).

• In Media & Advertising: Wells Fargo initiated LAMR with an Equal Weight and $132 tgt saying Digital OOH stands to gain share as it’s currently a $3B market vs ex-OOH digital at ~ $240B and TV at ~$65B while they assumed/downgraded CCO to Equal Weight w/ $1.75 PT (from $2.75) as thinks Europe-N is facing challenges to transact, and without inorganic deleveraging it’s tough to see a rerating. Deleveraging thesis pushed out.
• In Restaurants: Olive Garden and LongHorn Steakhouse parent DRI reported Q1 EPS of $1.75 missing the $1.83 consensus estimate citing weaker traffic, with revs of $2.757B missing the $2.8B estimate, but backed guidance for the full year. Q1 same-restaurant sales were down (-1.1%) vs. est. decline of (-0.3%). Darden also announces delivery partnership with UBER set to begin with its Olive Garden restaurants in late 2024. CBRL also reported a top and bottom line Q4 miss while guided midpoint of Fy25 revs in-line with consensus.

• DASH +3%; was upgraded to Buy from Neutral at BTIG saying its checks signal continued strength, while touting underappreciated longer-term drivers.
• DRI +7%; on earnings and as announced a 2-year exclusive partnership with UBER, have ability to expand to other brands if it works for Olive Garden; reported Q1 EPS of $1.75 missing the $1.83 consensus estimate citing weaker traffic, with revs of $2.757B missing the $2.8B estimate, but backed guidance for the full year.
• KEY +3%; strength in regional and large cap banks on Fed; on hopes the will benefit in the longer run as interest rate cuts would help ease deposit costs, which has pressured net interest margin; though could see temporary headwinds as interest income is expected to take a hit. The strength carried over to regional banks (KRE) and other financials.
• MBLY +10%; as INTC stated today it currently has no plans to divest a majority stake in MBLY. Note INTC was considering options for its stake in MBLY as part of a major strategy overhaul, Bloomberg News reported earlier this month.
• NVDA +4%; as high growth semiconductor stocks benefit from Fed rate cut, as the Philadelphia Semi Index (SOX) jumps 3.5% to 5,030 approaching its 50dma resistance around 5,040; AVGO, ASML, ARM higher.

• HE -6%; shares slipped after files up to $250M “at-the-market” (ATM) equity sales program and said plans to use net proceeds from any sales to invest in loans to Hawaiian Electric Industries (HEI) subsidiaries, finance strategic investments or potential acquisitions, and fund litigation expenses related to Maui wildfire settlement.
• MUSA -3%; along with weakness in CASY, as both were downgraded to Underweight from Neutral at JP Morgan saying valuation looks stretched.
• PGNY -29%; shares tumbled after revealing in an 8K that a significant” client had exercised a 90-day option to terminate its contract with PGNY, effective January 1, 2025. This client represented 670K members (~10% of its Q2 total) and ~13% of 1H24 revenue ($76M). PGNY disclosed that the client represents a smaller percentage of adjusted EBITDA.
• SCS -10%; after posted lower-than-expected Q2 revenue ($855.8M vs. est. $864M) and guided for a downbeat Q3 (sees revenue between $785M-$810M vs. est. $812.1M) saying quarter was hurt by decreased ordering from large corporate customers, as well as declines across most major international markets.
• VNDA -8%; after saying the FDA declined to approve its stomach paralysis drug, Tradipitant, suggesting that Vanda conduct additional studies; VNDA plans to submit separate marketing application for Tradipitant to prevent vomiting during motion sickness later this year.