Closing Recap

Friday, February 24, 2023

Equity Market Recap

·     US equities slid after disappointing inflation data but found some support around the 200dma in the S&P 500. An array of Fed speakers then took over, but comments were fairly measured, if not a bit dovish. Mester reiterated an outlook for low growth, but no recession. Bullard reiterated a soft landing is still possible and that the markets appear to have factored in the possibility of a more aggressive fed. Jefferson sounded a bit more hawkish, indicating while inflation may come down, it will be slow and that the Fed cannot wait for the supply side to work itself out. That latter comment, though, is consistent with the demand-destruction efforts already behind Fed tightening.

·     Not much bullishness on the data front today. @RBAdvisors points out history says we need a meaningfully positive real Fed Funds rate to slow the economy, but today’s PCE data says we’re only at +5bps so there’s more work to do. @KobeissiLetter highlights the move in mortgage rates above 7% has pushed mortgage demand to its lowest level since 1995 and that the housing affordability index now indicates the average house is less affordable than in 2008. In the wait-and-see category, @RenMacLLC highlights their most tactical oversold indicator triggered on the SPX but we will have to wait to see whether it sticks or fails.

·     Heading into the final hour of trading, only Materials (XLB, +0.21, Utilities (XLU, +0.23%) and Financials (XLF, +0.18%) were sector gainers, while Technology (XLK, -1.6%) and Consumer Discretionary (XLY, -1.5%) were the biggest laggards. Breadth was solidly negative, with decliners over advancers by about 3.4:1 and Value and Growth were also in the red. Growth slid -1.8% and Value -0.8%

Economic Data:

·     Inflation data disappoints as January overall PCE price index m/m rises +0.6% vs. Dec +0.2% and Jan PCE prices rise 5.4% vs. 5.0% in December. The core PCE Prices M/M rises +0.6% vs. est. +0.4% (and Jan revised to +0.4% from +0.3%) and core PCE y/y rises +4.7% vs. est. +4.3% (and Dec revised to 5.3% from 5%).

·     January personal saving rate 4.7% vs Dec 4.5%; Jan Personal Spending +1.8% above consensus +1.3% and Dec (-0.1%) while Jan real consumer spending +1.1% vs Dec (-0.3%).

·     University of Michigan surveys of consumers sentiment Feb-F 67.0 vs. est. 66.4 and preliminary 66.4 and final Jan 64.9; current conditions index Feb-F 70.7 vs prelim Feb prelim 72.6 and expectations index Feb-F 64.7 vs prelim Feb 62.3

·     University of Michigan surveys of consumers 1-year inflation outlook final February 4.1% vs preliminary 4.2% and final January 3.9% and the surveys of consumers 5-year inflation outlook final February 2.9% vs preliminary 2.9% and final January 2.9%.

·     New Home Sales for January at 670K annual rate vs. est. 620K and December 625K; single-family home sales +7.2% vs dec +7.2% (prev +2.3%); home sales Northeast -19.4%, Midwest -6.9%, South +17.1%, and West -7.3%; new home supply 7.9 months’ worth at current pace vs dec 8.7 months; median sale price $427,500, -0.7% y/y.

Commodities

·     April gold settled -$9.70, or -0.53%, at $1,817.10/oz. The move marked another new lowest close of 2023 and the fourth consecutive down week after today’s stronger inflation data again reinforced the higher-for-longer rates reality.

·     April WTI crude oil settled +$0.93, or +1.23%, at $76.32/bbl., while Brent crude April futures finished at $83.16/bbl, up $0.95, or 1.16%. The better close marked the second consecutive up day for WTI futures after a six-session decline.

·     April natural gas settled +$0.116, or +4.77% to finish a strong week and mark the best weekly gain since late November.

Currencies & Treasuries

·     U.S. Dollar hits fresh two-month high above of 136 vs yen, and the dollar index (DXY) hits 7-week highs above 105 after this mornings’ economic data. U.S. Treasury yields jumped with two-year yields hitting highest levels since 2007 above 4.77% after data showed that U.S. consumer spending rebounded sharply in January amid strong income growth, while inflation accelerated. The personal consumption expenditures (PCE) price index also shot up 0.6% last month, after gaining 0.2% in December – likely keeping pressure on the Fed to keep hiking rates.

Sector News Breakdown

Consumer

·     In retailers: CRI guides full-year sales and profit below expectations, hurt by slowing apparel demand and wholesale customers tightening inventory (guided sales $3B vs. est. $3.18B and earnings profit of $6.15 vs. est. $6.37) while Q4 beats. Auto retail, CVNA shares slide after posting a wider-than-expected Q4 net loss hurt by shrinking demand for used vehicles and said continued to face worsening industry headwinds in 4Q.

·     In leisure: in towables (THO, WGO), Citigroup said they think that near-term RV estimates need to come down, starting with RVIA reported shipments for the month of January, followed by the updated RVIA 2023 outlook (March 1st), THO 2Q earnings (March 7th), and WGO 2Q earnings (late March) – primarily a function of substantially scaled back shipments.

·     In online travel BKNG posts record bights in January and higher direct traffic mix; management provided ’23 EBITDA guidance ~5–7% above consensus and low-teens bookings growth (above Street’s +8%) implies high-single digit growth after 1Q.

·     In Food/staples: BYND shares jump as 4q ADJ EPS ($1.05) vs est. ($1.18) on revs $79.9Mm vs est. $75.7Mm; sees FY23 net revs $375-415Mm vs est. $394.2Mm, continues to Target cash flow positive ops withing 2H2.

·     In restaurants: DPZ downgraded by a couple of analysts after results as Q4 disappoints. Domestic SSS growth of 0.9% was below 3.5% consensus while international SSS growth (ex. FX) of 2.6% was below 3.5% consensus; WING downgrade from Outperform to Market Perform w/ $190 PT at BMO which does not reflect a change in view of fundamentals, but rather discipline as believe shares are more fully valued following the ~30% appreciation in shares year-to-date. Wedbush previews WEN’s after Q4 preannouncement, 2023 guidance will be the focus.

Energy

·     In E&P: EOG reported results that missed Q4 profit estimates, hurt by higher costs and lower demand and forecast Q1 production in the range of 902,600 to 939,400 barrels of oil equivalent per day (boepd) and full-year 2023 production between 944,000 and 1,027,600 boepd (EPS/EBITDA of $3.30/$3.4B compared to consensus of $3.39/$3.6B); SWN reported Q4 adj EPS/EBITDA slightly ahead of consensus on flat q-q costs (EPS/EBITDA of $0.26/$732mm compared to consensus of $0.26/$696mm). Late Friday, Bloomberg reported that PXD is said to weigh deal for us shale gas explorer RRC, sending those shares higher. https://bit.ly/3IPbTFA

Financials

·     In financials: GS approved new share repurchase authorizing buyback of up to $30B (inclusive of shares repurchased in 2023) of common stock which equates to over 23% of market cap. INTU posted Q2 EPS and rev beat while guided Q3 results below views but maintained its year revenuer outlook.

·     In Fintech: SQ 4Q22 results came in above expectations on both the top and bottom line as impressive results in Cash App offset softer Seller results as FX headwinds; said it was slowing down hiring this year but would still increase headcount by around 10% through the end of 2023; WU and Beforepay Offer ‘send now, pay later’ service to consumers for international money transfers.

Healthcare

·     In Biotech: NKTR shares fall after announcing Phase 2 topline data for REZPEG in systemic lupus erythematosus (SLE) in which the primary endpoint was not met. Lilly has notified Nektar that they do not intend to advance REZPEG to Phase 3 development for SLE; CCCC downgraded to Underweight at JPMorgan saying while timelines continue track toward clinical updates for CFT7455 (MM) and CFT8634 (synovial + SMARCB1-null tumors) in 2H23, they remain somewhat skeptical of the value accretive potential of these events. NEO upgraded to Buy at Benchmark after reported better than expected 4Q results and introduced a 2023 revenue guide of $545-555 million that was ahead of the prevailing consensus of $535 million. FULC tumbles after earlier posted full clinical hold on FTX-6058 in sickle cell disease.

·     Services & MedTech: PODD reported strong beat in 4Q as accelerated demand related to the Omnipod 5 launch in the U.S. continues, and as key metrics like patient adds in all major categories, including MDI, conversions, and total, clocked in another record quarter. GH reported 4Q22 results that were essentially in line with its preliminary results announced in early January. TCMD 2.5M share Spot Secondary priced at $13.00.

Industrials & Materials

·     Aerospace & Defense: BA shares fall after saying it has temporarily halted deliveries of its 787 Dreamliner jets as the U.S. plane maker conducts additional analysis on a fuselage component; KTOS upgraded to Buy from Hold at Canaccord saying the company is now building a new production lot of 12 Valkyries and two Valkyries for the Navy are being assembled – company also reported quarterly results.

·     In Industrials: GWW upgraded to sector perform from underperform at RBC Capital citing the company’s recent surge in market outgrowth in the highly fragmented industrial MRO distribution market.

·     In chemicals: LYB upgraded to outperform and raising PT and FY24 Estimates at RBC Capital as see the opportunity for continued multiple expansion as LYB climbs out of its Q4-Q1 trough, increases its capital return, and improves its ESG profile.

Technology, Media & Telecom

·     In Media & Telco: WBD 4Q revenue and adj. EBITDA were largely in-line with consensus forecasts with DTC outperformance offset by modestly softer Studio and higher corp. expenses; WOW downgraded from Strong Buy to Outperform at Raymond James following 4Q results saying the potential for a catalyst now appears farther off, and as such it may take longer to realize a more appropriate multiple. LYV shares tumble following quarterly results.

·     In software: ADBE shares slip after a Bloomberg article last night stated the DOJ is preparing antitrust suit related to $20B Figma deal. Bank America notes deal not closing would mean Adobe may have to develop a competing offering inhouse – likely a multi-year effort; MSFT tgt raised to $290 from $280 at Wedbush and maintain OP reflecting more positive recent cloud checks; ADSK reported below-consensus FY24 guidance as revenue, EPS, billings, and FCF and management outlined a new Rule of 45 "target plan" (10-15% revenue growth + 30-35% FCF margin) for several years out. BIGC another software name falling after quarterly results.

·     In semiconductors: German chip equipment supplier Siltronic slides after forecasts 2023 revenue and EBITDA margin "significantly below" last year’s level, citing lower volumes and exchange rate effects along with inflation-related cost increases.

·     In Hardware/PC: Bernstein previews DELL, HPQ, HPE, lowering estimate saying the PC market is clearly very weak, while enterprise demand appears ok. for now.CY Q4 PC market units declined -28% YoY and experienced the largest overall sequential drop in over 15 years. We now see PC shipments declining 10%+ in CY 23, from ~290M to~260M.