Closing Recap

Friday, July 15, 2022

Equity Market Recap

·     U.S. stocks jump as upbeat retail sales data allayed some concerns about an imminent recession, while investors scaled back bets of a massive interest rate hike of 100-bps later this month after comments from Federal Reserve policymakers and inflation data today. It was a broad-based stock rally on Friday, paced by gains in financials after bank earnings were well received (Citigroup surges 12% post results), and healthcare as utilities and staples lag. The S&P 500 and Dow each snapped their respective 5-day losing streaks (which ties for the longest streak for the S&P since 2020) and posts their biggest one-day gains since late June. Inflation expectations declined in this morning’s University of Michigan sentiment figure as survey of consumers 1-year inflation outlook prelim July 5.2% vs final June 5.3% and relative to the preliminary June report, long-term (5-10 years) inflation expectations in the UMich report have dropped from 3.3% down to 2.8%. Stocks popped following the data and never looked back. Recall two of the Fed’s most hawkish policymakers on Thursday (Waller, Bullard) said they favored another 75-bps rate increase this month, though kept the door open for other moves based on data. Odds of a 100-bps rate hike stood at about 30% after rising to nearly 80% earlier this week, per CME Group’s FedWatch tool. With the FOMC meeting over a week away, focus next week may be on earnings, with ¼ of the Dow is expected to report earnings next week and roughly 1/8^th of the S&P 500.

Economic Data:

·     U.S. consumer sentiment index rose 1.1 to 51.1 in the preliminary July print from the University of Michigan survey after diving -8.4 points to a record low 50.0 in June, above ests of 49.9 (and down from 81.2 y/y) Current conditions index climbed to 57.1 from 53.8 in June and expectations gauge dipped to 47.3 from the prior 47.5 which was the worst since 1980.

·     Inflation expectations from the UoM report lifts sentiment: the 1-year inflation metric eased to 5.2% from 5.3% and the 5.4% high going back to 1981. The 5–10-year price index fell to 2.8% from 3.1%, an 11-year high.

·     Retail Sales for June recover, rising +1.0% M/M vs. +0.9% expected and -0.1% prior, while retail sales ex-gas and autos rise +0.7% M/M vs. -0.2% expected and retail less autos rise +1.0% M/M vs. +0.6% expected and +0.6% prior

·     NY Fed Empire State current business conditions index +11.1 in July vs -1.2 in June as the new orders index rises +6.2 in July vs +5.3 in June 15; prices paid index +64.3 in July vs +78.6 in June; employment index at +18.0 in July vs +19.0 in June and the Empire state six-month business conditions index -6.2 in July vs +14.0 in June

·     Industrial Production for June fell -0.2% vs. est. +0.1% and May unchanged at +0.1%; June capacity use rate 80.0% vs. est. 80.6% and May 80.3 pct; June manufacturing output -0.5% vs. May -0.5% (previous -0.2%)

·     Import prices for June rose +0.2% M/M vs. +0.7% consensus and +0.5% in May (revised down from +0.6%), while Export prices rise +0.7% M/M vs. +1.2% expected and +2.9% prior (revised down from +2.8%)

·     U.S. May Business Inventories rose +1.4% vs. est. +1.3%; U.S. May business sales +0.7% vs April +0.6%; U.S. May retail inventories ex-autos unrevised at +0.8%; May inventory/sales ratio 1.30 months’ worth vs April 1.29 months

Commodities

·     Oil prices end the day higher, with WTI crude up $1.81 or 1.89% to settle at $97.59 per barrel (highs $99.03 and lows $94.57) as markets downplayed expectations President Joe Biden’s meetings with top Saudi officials, including Crown Prince Mohammed bin Salman, would get them to boost oil output. WTI crude fell 6.9% for the week on fears aggressive tightening by the Federal Reserve will slow the economy.

·     Prices at the pump falling again – 31 days straight! The national average fell 3.5c/gal to $4.567 per gallon, a 47 cent drop in the last 31 days, one of the largest monthly declines on record, according to industry data. Baker Hughes reports that the U.S. rig count is up 4 from last week to 756 with oil rigs up 2 to 599, gas rigs unchanged at 153 and miscellaneous rigs up 2 to 4.

·     Natural gas prices gained 98.20 cents per million British thermal units, or 16.27% to $7.0160 per million British thermal units this week, rising a 2^nd week. Gold prices fail to rally despite the dollar easing on Friday, down -$2.20 to settle at $1,703.60 an ounce; gold prices end lower for a 5^th consecutive week.

Currencies & Treasuries

·     Federal Reserve Bank of St. Louis President James Bullard said Friday that unexpectedly high inflation calls for a more aggressive path of short-term interest rate rises this year. Because of this, Bullard said that instead of his prior forecast of getting the federal funds target rate to 3.5% by year-end, he now believes the Federal Reserve will need to boost its target rate range to 3.75% to 4% by the end of the year.

·     After a volatile week for Treasury yields and the dollar, thinks were a bit “tamer” on Friday as yields slipped on reduced inflation expectations after the UoM confidence data, as the 10-yr ended at 2.92%, still inverted against the 2-yr around 3.10% (but better than the 27-bps inversion seen yesterday). The US dollar index (DXY) slides around -0.5% back below 108 level (after hitting more than 20-yr highs Thursday above 109), but it was still a monster weak for the buck after the euro traded to parity yesterday for first time since 2002 and the yen hit 24-year lows. Bitcoin ends a volatile week higher, rising back near $21,000

Sector News Breakdown

Consumer

·     Retailers; CURV downgraded to Market Perform at Cowen and cut tgt to $7 from $11 given near-term risks from the potential for higher Mark downs in 2H22 & CURV’s high exposure to lower income consumers & execution risk as watch a shift in management’s strategy for Torrid Curve, promotions, & marketing; NLS said connected fitness members exceeded 360k, representing a 13% sequential growth in a seasonally slow qtr and says remains on track to surpass 500k by FY23 end; luxury retailers lagged early (CPRI, RL, BURBY, CFRUY) following data showing a slowdown in China growth (GDP miss), renewing concerns about the outlook for the world’s top luxury goods market; UBS lowered sector price targets for retailers

·     Consumer Staples & Restaurants: in tobacco, Stifel maintains positive outlook for tobacco stocks in front of 2Q22 earnings even as they acknowledge the slower growth outlook in the first half of the year for MO(tough comps) and PM (inventory timing, FX); for QSR, Loop Capital said their latest Burger King U.S. franchisee checks indicate same-store sales improved in June, as comps recovered to 2.0-3.0% growth in June, compared to a 1.0-2.0% decline in April and May; RRGB names G.J. Hart as President and CEO effective Sep 6th (immediately expressed interest in the role) after CEO Murphy recently informed the board of his retirement

Energy

·     Energy stock movers: a bounce back for energy stocks after a rough week, with commodity prices easing as the dollar pares recent gains; in research, CHX, FTI upgraded to Buy from Neutral, and NEX, PFHC, PTEN all downgraded to neutral from Buy at bank America, shuffling ratings to balance recession risk and a thematic pivot to international. Said tempering their ’23 outlook, which now reflects a ’23 Brent curve that’s down 18% from $104 peak.

·     Refiners: ahead of earnings, RBC Capital previews the group (VLO ), saying they think robust 2Q results are well anticipated by the market; however, what may be underappreciated is just how different the refiners (and their balance sheets) will look just from last quarter. See several benefits from the cash that is expected to be generated during 2Q, and the group is not sitting still. We have already seen debt retirements accelerating and dividends reinstated, and we think there could be upside surprises on the pace of stock buybacks.

·     Utilities & Solar; Solar stocks tumble (FSLR, SPWR, ENPH, SEDG, RUN, JKS, CSIQ, ARRY, SHLS) after Senator Joe Manchin reportedly told Democratic leaders he would not support an economic package that includes tax increases or new spending on climate measures, according to Bloomberg. Manchin and Senate Majority Leader Chuck Schumer had been negotiating over hundreds of billions in spending on climate change measures, including some tax breaks for renewable energy, EVs and other clean power sources; in the coal sector, BTU guides prelim 2q adj EBITDA $570M to $590M below est. $651.3M; said sees prelim revenue $1.31B-$1.34B vs. est. $1.4B; said continued to reduce its outstanding debt during the quarter

Financials

·     Bank movers: big banks mixed after Citigroup (C) Q2 revenue rises 10% to $19.6B well above the $18.22B estimate as strong FICC and fixed income trading offset higher expenses up 8% YoY; Q2 profit fell to $4.5B, or $2.19 per share, from $6.19B Y/Y but above est. $1.66; WFC not so good as Q2 EPS $0.74 missed the $0.80 estimate and revs $17.03B missed the est. $17.54B as Q2 net interest income $916M below est. $10.15B and Q2 provision for credit losses $580 mln vs benefit of $1,260 mln last year – Wells Fargo CFO says bank has seen big slowdown in mortgage refinancing lines, sees challenges in mortgage banking for next few quarters

·     Regional banks earnings: PNC with Q2 revenue beat, higher NII higher earning assets and yields, NIM 2.50% from 2.28%, avg loans up 5% driven by commercial, while TBV fell (7%) due to AOCI impact and mgmt 3Q guide revenue up 3-5% from 2Q, core expenses up 2-3% from 2q; USB Q2 revenue beat higher NII. avg loans up 3.6% QoQ and 10.25 YoY; CET1 9.7% from 9.9%

·     Trust banks active on earnings: BK Q2 EPS $1.03 vs. est. $1.12; Q2 revs $4.25B vs. est. $4.18B; Q2 provision for credit losses $47M, vs. est. $3.9M; qtr end aum of $1.9 trillion, decreased 17% primarily driven by market values; qtrly total noninterest expense of $3.1 billion, increased 12%; and STT with an EPS beat of $1.94 vs. estimate $1.73 as revs fell -2.7% Y/Y to $2.95B missing the $2.99B estimate as fee revs -5.7% Y/Y to $2.37B and higher provision for credit losses of $10M; said net interest income (NII) rises 25% Y/Y to $584M

·     Consumer Finance; DFS said credit card delinquency rate 1.03% at June end vs 1.04% at May end; credit card charge-off rate 1.19% at June end vs 1.32% at May end; Wells Fargo CFO says bank has seen big slowdown in mortgage refinancing lines, sees challenges in mortgage banking for next few quarters; AXP U.S. Small business card member loans 30 days past due loans as a % of total 0.6% at June end vs 0.6% at May end and net write-off rate-principal only 0.8 % at June end vs 0.9% at May end

·     Alt Managers: BLK Q2 adj EPS $7.36 vs. est. $7.90; Q2 revs $4.53B vs. est. $4.65B; assets under management at qtr-end were $8.5 trillion vs $9.5 trillion reported at Q2 2021 end – Lower AUM and total net inflows $89.83bn offset better adj operating margin 43.75%

·     Financial Services: in the staffing sector, Truist downgraded RHI to Sell from Hold w/$66 PT and cut MAN to Hold from Buy as lower estimates ahead of 2Q22 results in their Human Capital coverage to reflect a moderate recession scenario for 2023 akin to ’20 ex-pandemic (said favorites remain ASGN, KFY, NSP); in REITs, shares of IIPR fall after saying Kings Garden, a tenant in six properties, defaulted on obligations for base rent and property management fees for July in each of its leases

Healthcare

·     Biotech movers; CDXS guides FY22 revs $135M-$1441M below prior $152M-$158M and est. $155.5M; sees Q2 revs about $38M vs. est. $40.2M; announces agreement with PFE to supply enzyme for the manufacture of Paxlovid; ALLO was upgraded to Buy at Goldman Sachs ahead of key inflection points as they anticipate a period of execution on lead allogeneic CAR T programs ALLO-501A (anti-CD-19) in relapsed/refractory large B cell lymphoma

·     MedTech Equipment; TXG tumbles after guiding prelim Q2 revs to be approximately $114.5M, an approximate 1% decrease from $115.8M for the prior year and below est. $127.7M; DXCM was initiated at Outperform and $105 tgt at Bernstein calling it the leading innovator in one of the most attractive markets in MedTech (diabetes); Deutsche bank warns for the space that “winter is coming” saying hospital CAPEX reductions could start in CY 4Q:22 as the capital spending outlook for FY2023 has become increasingly precarious (SYK, BSX, etc.)

·     Healthcare Services; managed care sector jumps after good earnings and guide from UNH as Q2 adj EPS $5.57 vs. est. $51.9; Q2 revs $80.33B vs. est. $79.68B; raises FY22 adj EPS view to $21.40-$21.90 from $21.20-$21.70; Optum Q2 revenues of $45.1B grew $6.8B or 18% Y/Y; Q2 medical care ratio was 81.5% compared to 82.8% last year, due to covid effects and business mix

Industrials & Materials

·     Aerospace & Defense; BA and Airbus SE sales staff will hit the tarmac next week at the Farnborough International Air Show next week, the first of the biggest commercial aviation shows since the pandemic largely shut down air travel; SPCE said it will set up a new facility in Greater Phoenix area, Arizona, for manufacturing Delta class spaceships that will be operational by late 2023; in business jet sector, Cowen with tgt changes in space as ERJ to $10 from $12, GD to $260 from $250 and TXT to $86 from $95 saying the group looks oversold given extent of potential cyclical slowing is unclear & Q2 risks appear well understood with some potential signs of light; EVTL rises after saying AAL has confirmed delivery slots for the first 50 VX4 aircraft of an initial pre-order of up to 250 aircraft, with an option for up to 100 more

·     Industrial & Machinery; GNRC, PWR, GTLS and others (some of the backbones of alternative energy) saw weakness today following reports Senator Joe Manchin reportedly told Democratic leaders he would not support an economic package that includes tax increases or new spending on climate measures (which crushed solar stocks); HSC shares slide after guiding Q2 adj EBITDA $47.5M-$50M and said sees Q2 GAAP operating loss ($97M)-($95M)

·     Transports; in the rail sector, CSX and NSC both upgraded to Buy from Hold at Stifel saying for they estimate Norfolk Southern’s 2Q22 total carload volume contracted 3.4% y/y, and grew 5.8% vs 1Q22 and are expecting CSX’s total volume to be flat y/y in 2Q22, and up 6.3% sequentially; Wolfe Research downgraded the airline sector to Market Weight from Overweight saying while they think Airlines can grow EPS next year, their C23 EPS estimates are now more than 50% below Consensus on average (the firm upgraded ALGT but downgraded AAL, SNCY, ULCC); DAL was downgraded from Buy to Hold at Argus saying Delta has benefited from the lifting of COVID travel restrictions and increased demand for transatlantic flights, but has also been hurt by capacity reductions/staffing shortages, and recently posted weaker-than-expected 2Q earnings.

·     Metals & Materials; RIO warns that COVID-related labor shortages led to a 2% drop in iron ore shipments in H1; misses across the board in its second-quarter update on output, but it maintained guidance on its full-year iron ore shipments; Q2 shipments rose 4.7% to 79.9 Mt; gold miners (AEM, GOLD, HL, KGC) making 52-week lows this week with gold prices at 1-year lows

Technology, Media & Telecom

·     Media & Internet: PINS shares rise after the WSJ reported activist investor Elliott Management Corp. has built a stake of more than 9% in recent months — partly in common stock, and has been in discussions with Pinterest the past several weeks https://on.wsj.com/3AYu8EW; US listed Chinese stocks slide after weaker GDP results in region overnight (BABA, BIDU, JD, NTES, PDD all lower early); for TWTR, Judge sets July 19 hearing in Twitter lawsuit against Elon musk to consider request for September trial; YELP assumed/downgraded to Neutral at Goldman Sachs and cut tgt to $33 from $49; DIS raising the price of its ESPN+ streaming service by 43% next month, increased to $9.99 a month from $6.99 starting on August 23; massive outperformance in NFLX ahead of earnings next Tuesday rising over 7% (shares down -70% YTD)

·     Semiconductors: Wells Fargo lowers WFE forecast in anticipate of a slowdown in capex spending and thus WFE; adjust ‘22 WFE forecast to $96B from $99.2B, given continued supply chain challenges across the industry; also cuts C2023 WFE ests to $91B (from $105B), now reflecting -6% y/y (vs. prior +6% y/y est.); Deutsche bank cut WDC tgt to $64 from $72 and STX to $82 from $95 saying weaker flash demand/pricing is the primary driver for downward revision, but also see some HDD weakness as cloud and enterprise spending will likely turn more cautious; Bank America said Gaming GPUs (NVDA, AMD) are now selling at 15%-20% premiums above MSRP versus prices 75%-125%+ above MSRP in March

·     Hardware, Software movers; for video gamers (ATVI, EA, TTWO, PLTK) U.S. Consumer spending on video game hardware, content and accessories stood at $4.3B in June, down -11% from a year ago, according to research firm NPD overnight. Video game hardware dollar sales for June declined 8% Y/Y. "Elden Ring" topped the best-selling titles chart, followed by Warner Bros. Interactive’s "LEGO Star Wars: The Skywalker Saga"