Closing Recap

Thursday, August 25, 2022

Equity Market Recap

·     Stocks ramped higher into the close to finish at the highs, showing no concern or fear ahead of highly anticipated comments from Fed Chairman Powell at the Fed Jackson Hole Symposium tomorrow morning. Several Fed speakers today remained hawkish, while inflation data (PCE in the GDP report) also showed prices remained high/slightly above views, but markets were unphased, believing Powell will remain market friendly. How big will the Fed go in September, 50 or 75-basis points remains the market question after having risen by 75-bps in each of the last 2-meetings (now a minimum of at least 200-bps increase in just 3 months expected, while the S&P remains roughly 6% from all-time highs). Path of least resistance since the start of July has remained to the upside (after an abysmal 1H) as markets have battled higher on good, bad, and indifferent news. Perfect example today was chip giant NVDA rising over 2% after issuing its 2^nd revenue warning in a month as chip names powered higher (similar theme to several tech names over the last month). The Nasdaq finished higher by 1.6% despite lower guides from NVDA, CRM and SPLK. Retail has been different, with several names falling today on lower earnings and/or guidance as ANF, BURL, DG, DLTR, GES, PTON all sliding. Global stocks got a boost overnight after China announced a 19-point plan worth CNY1T($146B) in new stimulus to boost the economy, boosting global markets. Prelim Q2 GDP data showed a slight improvement but still a negative reading while inflation data (PCE) was in-line. Markets await Fed Powell tomorrow as well as July data on personal income, spending and core PCE – stay tuned!

·     Federal Reserve Bank of Kansas City leader Esther George (voting member) said high inflation calls for more rate rises, in an interview on CNBC Thursday. She declined to say what she would like to see happen at the central bank’s monetary policy meeting next month. Ms. George said on CNBC that it is unclear whether signs that high inflation might be slowing will be sustained.

·     St Louis Fed President Bullard in interview on CNBC said 3.75 -4% is his target for this year and likes frontloading rates as it shows you are serious about inflation fight. He said after rates get above 3.75%-4%, not quite sure what’s next. “My baseline is that inflation will be more persistent than what many expect.”

·     In a WSJ interview, Atlanta Fed Pres Bostic reiterated recent messaging by noting hopeful signs on inflation but said it’s too soon to declare victory. “We may hike 50bp on 9/21 or we may hike 75bp – we don’t know yet because there is still some critical data that will arrive before then.”

Economic Data:

·     PCE Inflation data in GDP report: 2Q Prelim Core PCE Price Index +4.4% vs. estimate +4.4%; 2Q Prelim PCE Price Index +7.1% vs. est. +7.1%. The Q2 GDP (second estimate) prelim -0.6% vs. -0.8% consensus and prior estimate of -0.9%. In Q1, U.S. GDP fell 1.6%; 2Q GDP price index rises at an 9% annual rate vs. est. 8.7% (prior was 8.9%); 2Q Prelim Real Final Sales +1.3% vs. prior +1.1%

·     Weekly Jobless Claims fell to 243K in the latest week vs. est. 253K and vs. 245K prior week; the 4-week moving average rose to 247K from 245.5K prior week; continued claims fell to 1.415M from 1.434M prior; the US insured unemployment rate unchanged at 1.0%

Commodities, Currencies & Treasuries

·     Oil prices tumbled late day as WTI crude slid -$2.37 or 2.5% to settle at $92.52 per barrel, giving back some of its gains this week and down for the first time in three days, while Brent crude settle at $99.34/bbl, down $1.88, 1.86%. Saudi Arabia suggested that OPEC could decide to cut production if an Iranian nuclear deal is reached, as an agreement would lift Western sanctions and ultimately see additional oil barrels come onto the global market. Gold prices rise $9.90 or +0.6% to settle at $1,771.40 an ounce, rising a 3^rd straight session (after falling 6-straight sessions prior) ahead of Fed Chairman Powell tomorrow

·     Fairly quiet in currencies and yields ahead of the Fed Powell commentary tomorrow at Jackson Hole, with investors just waiting. The 10-yr yield held just below 3.1% after a recent rise to 8-week highs earlier, while the dollar index (DXY) was little changed after another test of its 20-year high levels this week and as the euro moved back below parity vs. the buck. Economic data in the U.S. has weakened, but even moreso in Europe following sharply lower PMI readings. The GDP and PCE data this morning did little to move markets with all eyes on Fed speak tomorrow. 10y yield faded off morning highs of 3.128% – dipping below 3.03% following the 7y auction.

Sector News Breakdown

Consumer

·     Retailers; ANF lowered its full-year sales forecast after falling short of consensus for quarterly sales ($805.1M vs. est. $841.6M) – now expects 2022 net sales to decline mid-single digits in fiscal 2022, compared with its earlier forecast of flat to 2% growth; DXLG raised its year forecasts as second- quarter results topped estimates; GES falls as Q2 adj EPS $0.39 vs. est. $0.45; Q2 revs rose 2% y/y and 12% in c/c to $643M vs. est. $629.52M; Gross margin 42.1% vs. 46.8% y/y, estimate 42.6%; sees Q3 revenue down roughly 4.5% in constant currency y/y and cuts year rev view to 1.5% from 4%

·     Discount or off-price stocks: DG mixed as top/bottom line beat and raises FY22 comp sales to rise 4% to 4.5%, compared with its prior forecast for 3% to 3.5% growth – but inventory up 25% per store y/y & +57% over 3 years vs sales only +18%; DLTR slides as Q2 sales miss and guides Q3 EPS $1.05-$1.20 and sales $6.75B-$6.87B, both below views of $1.81/$6.92B and Q2nventory +56% vs 2019, on sales +18%; BURL cuts full-year adj profit per share forecast to between $3.70-$4.30, from prior $6.00-$7.00 and said it now expects fiscal 2022 comparable store sales to decrease in range of 13% to 15%, from decline of 6% to 9% estimated previously (also missed qtr sales)

·     Specialty retail: PTON losses widen and sales tumble in Q4 as total member count dropped slightly, as churn rates ticked higher & above 1%; QA4 revs $678.7M vs. est. $685.9M; the company isn’t offering up guidance for the fiscal year 2023; will no longer report quarterly engagement metrics; VSCO slips on Q2 miss as EPS $1.09 vs. $1.71 last year and Q2 sales fell -6% y/y to $1.52B vs. est. $1.56B; forecasting full year 2022 net sales to decrease in mid to high single digit range; ELY will change its corporate name to Topgolf Callaway Brands Corp and will change its ticker to MODGtightened its outlook for full-year sales

·     Auto sector: TSLA trades on adjusted 3 for 1 stock split; FREY was upgraded to Buy at Goldman Sachs as see FREY as a strong beneficiary from the recently enacted Inflation Reduction Act (IRA) in the US. FREY aims to build a 35GWh gigafactory in partnership with Koch Strategic Platforms (KSP) that is set to start production in 2025; Ford (F) said it will increase prices of Mustang Mach-E with updated features as it continues to ramp up production of the popular all-electric SUV

·     Housing & Building Products; in home furnishing, WSM 2Q comparable brand sales of +11.3% were well ahead of consensus +5.2% and the demand comp was positive in 2Q and has accelerated in the first three weeks of 3Q – comps +59.6% on a 3-year basis, and gross margin +810bps, and a reiterated FY22 guide; in research, Bank America downgraded homebuilders KBH, TOL to Neutral from Buy and LEN to Underperform while upgrade DFH to Neutral – notes KBH has the highest exposure out of builders coverage to markets where demand appears to slowing at the fastest pace (estimate 46% of deliveries in West) and TOL has relatively high concentration to slowing markets (38% of deliveries in West/Mountain) and built-to-order (80-85%), which we anticipate will cause TOL’s orders to underperform other builders

Energy

·     Energy stock movers: WSJ noted OPEC’s president the latest to back Saudi Arabia’s suggestion that the alliance might pump less — comments that pushed the price of a barrel back over $100 earlier this week. The growing consensus among members of the Organization of the Petroleum Exporting Countries and its Russian-led allies, known as OPEC+, threatens to keep energy prices elevated despite Biden administration efforts to get the members to pump more

·     E&P, Majors, and Pipelines: ET said it agreed to supply 2.1 mln tonnes of liquefied natural gas (LNG) per annum to SHEL for 20 years – ET will supply LNG from its Lake Charles export facility in Louisiana; in alternative energy, PLUG rises after signed a hydrogen supply deal with AMZN to provide liquid green hydrogen starting in 2025 to help the e-commerce giant hit its goal of net-zero carbon by 2040

Financials

·     Bank movers; Citigroup (C) says Russia exit will affect about 2,300 employees in 15 branches, expects $170Mm in costs from Russia exit and says it is still pursuing sales of some Russian consumer banking portfolios; in Canadian bank earnings; CIBC (CM) Q3 adjusted EPS of C$1.85 (US$1.43), beating the C$1.81 consensus, fell from C$1.96 in Q2 and increased from C$1.77 in Q3 2021; provision for credit losses were C$243M vs. C$303M in Q2 2022; TD Q3 Beats, C$2.09 vs C$2.04 consensus w/strong net interest income, expenses were lower, PTPP earnings were inline, margins grew in Canadian P&C and U.S.; in Services, NCR shares jumped on report Veritas Capital secured financing for takeover https://bit.ly/3PUJKNI

·     Insurance: Citi opens a positive catalyst watch on LNC (Neutral) given view that the market is implying an overly negative impact from its 3Q22 annual assumption review following PRU’s unexpected $1.4b net charge. They also roll-forward our positive catalyst watches on MET (Buy rated) and EQH (Buy rated) as see potential capital return upside post-redundant reserve mitigation. We reiterate our top-picks MET & HIG given lower relative exposure to near-term market & macro uncertainty, solid underlying fundamental trends, and capital return sustainability.

Healthcare

·     Pharma movers; one of the early standout decliners, with MRK, BMY, LLY falling sharply; vaccine names also underperform as MRNA, NVAX slide; VERV upgraded to Buy at Stifel with $56 tgt as think catalysts like VERVE-101 IND and its clinical data (2023) will drive shares; PFE said a Phase 3 trial of older adults testing its bivalent RSV vaccine candidate achieved 85.7% efficacy in participants with more severe disease.

·     Biotech movers: BCRX said the U.S. government has exercised its option to purchase an additional 10,000 doses of company’s antiviral influenza therapy, Rapivab, for about $7 mln; BMRN received conditional approval for its hemophilia gene therapy Roctavian in Europe, where the company says about 3,200 patients could be eligible to take the drug

·     Healthcare Services; AMWL, TDOC advance after the Washington Post reported overnight that AMZN will axe its Amazon Care telehealth business by the end of the year, The Washington Post reported https://wapo.st/3pGXyAH; FIGS shares jumped after Ron Baron on CNBC mentions positively – calls it the LULU of Healthcare and says has invested about $100M in it

Industrials & Materials

·     Transports, Industrial & Machinery; The Baltic Exchange’s main sea freight index posts its worst fall in three months, weighed down by lower demand for coal and iron ore cargoes as steel output fell in China. The overall index, factoring in rates for Capesize, panamax and Supramax shipping vessels, fell 90 points, or about 7.4%, to 1,123 points, a fresh low since Dec. 9, 2020. The Capesize index fell 206 points, or about 30.3%, to 474 points, hitting a low since early June 2020

·     Metals & Materials; strength in China, and general broad mkt strength boosted metals and mining stocks across the board after a mixed week; China’s industry ministry on Thursday issued draft rules to improve the supply capabilities of key resources including lithium, nickel, cobalt, and platinum. China will accelerate research and development of new types of batteries including sodium-ion batteries and hydrogen energy storage batteries, the Ministry of Industry and Information Technology said; fertilizer stocks (CF, MOS, NTR) advance as Hungary’s sole fertilizer maker joined a widening list of European producers cutting or halting output because of rocketing gas prices. Nitrogenmuvek Zrt. stopped producing ammonia in early August. Norwegian giant Yara International ASA announced a production cut on Thursday, while Poland’s largest chemical company Grupa Azoty trimmed ammonia output on record gas prices Monday

Technology, Media & Telecom

·     Media, Internet; BABA, BIDU, JD, PDD among US listed China stocks rise on China stimulus news overnight as well as a WSJ report that The U.S. and China are nearing an agreement that would allow American accounting regulators to travel to Hong Kong to inspect the audit records of Chinese companies listed in New York https://on.wsj.com/3TdyjUe

·     Semiconductors: group outperforms with broader strength in tech despite more disappointing results from NVDA overnight; NVDA posted results in line with its negative preannouncement, while guidance was lower than consensus again for next quarter, as the company is seeing continued channel inventory correction in Gaming on the back of macro headwinds and Crypto-related weakness; semi-index rose as much as 3% (SOX) initially.

·     Software movers: CRM reported better-than-expected Q2 revenue upside, and constant currency CRPO growth of 19% slightly beating the Street’s ~18% estimate but said due to broader macro challenges, the F3Q and 2H CRPO guidance was worse than expected; SNOW surges after better-than-expected F2Q23 results, with product growth of 83% above Street 72% and only 1% of deceleration from 1Q & the largest beat in 3 qtrs. and FY23 guide was slightly raised; SPLK reported mixed FQ2 results with better than expected revenue, EPS, and cash flow, but ARR was light driven by a shortfall in cloud – total ARR of $3.33B / +27% y/y was $55MM below Street $3.37B and of the $55MM miss, cloud accounted for $39MM; ADSK better F2Q results, and despite incremental FX headwinds, tightens FY23 at the midpoint of guidance across all metrics

·     Hardware, Components & Services; SONY said it will increase the recommended retail price of PlayStation 5 in various markets globally–but not in the U.S. Said the price increase is necessary due to the current global economic environment and its impact on the company’s business; NTAP rises post earnings results as July-Q revenue of $1.592bn (+9.2% y/y) beat Street estimates by ~$50mn, while EPS of $1.20 beat by 10 cents on opex leverage; BOX posted slight Q2 rev beat of $246M vs. est. $244.9M and in-line Q3 guidance but year guided to $992M-$996M vs. $1.21B