Mid-Morning Look

Friday, September 29, 2023

Despite a dismal September overall for U.S. stocks, investors receive a small glimmer of hope heading into seasonally strong October/November period, boosting stocks on the final trading day of the month after PCE core inflation, the preferred measure for the Fed, eased to its lowest level since the summer of 2021, dropping below 4% (in-line with ests). Retail and Consumer Discretionary stocks get a much-needed bounce as Dow component Nike (NKE) shares jump following a much better-than-feared earnings report showing a sharp decline in inventories. The 10-yr yield falls to a low at 4.5% (nearly 20-bps move off this week’s high of 4.69%) as inflation fears ease for the moment on the PCE data. Gold prices bounced, helped by a retreating dollar and Treasury yields on the data, partially easing fears of more aggressive rate hikes by the Fed in the future. Shares of the Big 3 automakers (GM, F, STLA) slide after reports the UAW to strike three assembly plants for each. Currently, the S&P 500 is down -4% for the month, the Dow -2.8%, the Nasdaq -4.9% and the Russell 2000 down about -5%.

In Washington, a shutdown of the federal government this weekend still looks highly probable as Congress thus far has been unable to enact a temporary spending bill before the new fiscal year starts on Oct. 1. The House of Representatives passed three of four bills put up for a vote late Thursday. A bill to continue funding government came to the floor Friday but did not pass given the divisions between Republicans and Democrats on key issues. In other political news, D-Sen Dianne Feinstein dies at age 90.

Positive headlines out of China also helping this morning as China’s cyberspace regulator proposed easing its stringent cross-border data-security controls, a move seen as an attempt to soothe concerns by foreign businesses wary of the country’s tightening grip over data in recent years. Technology stocks in Hong Kong rose sharply Friday after the release of the draft rules.

Economic Data (inflation data slightly better)

·     Personal Income M/M for August rose +0.4%, in-line with consensus (and up from +0.2% last month), while Personal Spending rose +0.4% vs. est. +0.5%; Aug personal saving rate 3.9%.

·     Aug Core PCE price index rises 0.1% M/M vs. est. 0.2% and +0.2% prior (better)

·     Aug core PCE price index rises 3.9% y/y, in-line with estimates (below prior month +4.2%) and marks the first reading below 4% since July of 2021 (better)

·     Aug PCE Price Index M/M rises +0.4% vs. est. +0.5% (prior +0.2%) and Y/Y rises +3.5%, in-line with consensus but slightly up from prior +3.3% reading. (mixed)

·     August Advance International Trade in Goods deficit shrinks to (-$84.27B) from (-$90.92B) in July and below (-$91.20B) consensus. Exports of goods were $168.9B, $3.6B more than July exports and Imports of goods were $253.1B, $3.1B less than July.

·     August Retail Inventories (Advance) +1.1% to $793.4B vs. +0.5% prior.

·     Chicago PMI for September fell further into contraction territory, reported at 44.1 from 48.7 in August and below consensus of 47.6. New orders biggest drag with a decline of nearly 18 points, marking the largest slip since April 2020. Production also fell, while order backlogs, conversely, improved by more than 10 points and supplier deliveries also increased, the index showed.

·     The University of Michigan consumers sentiment final Sept 68.1 vs. est. 67.7 and vs. Final Aug 69.5; current conditions index final Sept 71.4 vs prelim Sept 69.8 and final Aug 75.7 and the expectations index final Sept 66.0 vs prelim Sept 66.3 and final Aug 65.5.

·     University of Michigan surveys of consumers 1-year inflation outlook final sept 3.2% vs prelim 3.1% and final aug 3.5% and 5-year inflation outlook final sept 2.8% vs prelim 2.7%; final Aug 3.0%

Sector Movers Today

·     In Restaurants: EAT upgraded from Hold to Buy at Stifel with $45 tgt from $38 saying they came away more constructive from mgmt meetings regarding Chili’s turnaround efforts and believes plan mirrors the strategic playbook of successful restaurant turnarounds; WING remains top pick at TD Cowen and seen as best positioned in restaurants following California’s FAST Act while analysis of California suggests Market Perform rated JACK, SHAK, BROS and SG are most disadvantaged with the greatest potential EBITDA risk. QSR upgraded to Buy at Loop Capital after better-than-expected results from latest Burger King checks – indicated same-store sales were up 8.5-9.0% QTD through late September, ahead of consensus at up 7.7% for 3Q.

·     S&P Index changes: VLTO will be added to the S&P 500 effective prior to the open of trading on Monday, Oct 2, replacing DXC, which will move to the S&P SmallCap 600 replacing EBIX (S&P 500 &100 constituent DHR is spinning off Veralto). KLG will be added to the S&P SmallCap 600 replacing AVD effective prior to the open of trading on Tuesday, October 3. S&P 500 constituent Kellogg Co. (K) is spinning off WK Kellogg. VSTS will be added to the S&P MidCap 400 effective prior to the opening of trading on Monday, October 2, replacing KSS which will be moved to the S&P SmallCap 600 effective prior to the open of trading on Tuesday, October 3. Kohl’s will replace HA in the S&P SmallCap 600.

Stock GAINERS

·     APRN +133%; to be acquired by Wonder Group for $13.00 per share in cash, in deal valued at $103M, a 137% premium to yesterday closing price https://tinyurl.com/2s4jz5xb

·     BABA +2%; US listed Chinese stocks, specifically in tech (BABA, BIDU, JD, PDD) rise initially after China’s cyberspace regulator proposed easing its stringent cross-border data-security controls.

·     BUD +4%; upgraded to Buy from Neutral at Bank America saying the company’s margins are at an inflection point, as cost of goods sold pressures have started to ease.

·     EDIT +9%; upgraded from Hold to Buy at Stifel in the gene editing space and raise tgt to $17 from $9 saying EDIT-301’s (sickle cell disease) progress has received minimal credit from investors.

·     FL +4%; shares of sporting goods and footwear saw strength following the better-than-feared results from Nike overnight, with UAA, DKS, FL among movers.

·     GPCR +39%; after the company delivered positive results for its weight-loss drug GSBR-1290 and disclosed a $300 million private placement.

·     NKE +7%; Q1 inventories fell -10% y/y to $8.7B; 1Q revs missed consensus slightly while EPS beat by $0.18; revenue grew 2% cc led by 12% growth in Greater China, 6% growth in EMEA.

·     WBA +5%; after Bloomberg reported the company is considering former CI executive Tim Wentworth to be its next chief executive.

Stock LAGGARDS

·     EBIX -6%; after being replaced in the S&P SmallCap 600 by DXC.

·     SLB -3%; as top decliners in the S&P all in energy (HAL, BKR, HES, APA) as oil prices retreat further after hitting 10-month highs above $95 per barrel yesterday.

Syndicate:

·     Madrigal Pharmaceuticals (MDGL) 1.248M share Secondary priced at $151.69.

·     Opera (OPRA) 6.9M share Secondary priced at $12.25.

·     Portage Biotech (PRTG) sells 3.16M shares at $1.90 in a registered direct offering.

·     Synlogic (SYBX) prices 7.39M shares at $2.84 in an underwritten public offering.

·     Vaccinex Inc. (VCNX) prices 9.6M shares/warrants at $1.00.