Closing Recap

Friday, June 10, 2022

Equity Market Recap

·     U.S. stocks tumble a second day (worst back-to-back 2-day loss for SPY in 2-years) as surging inflation (fresh 40-year high CPI data) prompted a spike in Treasury yields (10-year hit 3.17% and the 2-yr hit 3.03%) and boosted expectations the Fed will need to raise rates more aggressively, despite signs of a slowing economy. A difficult situation for the Fed ahead of next week’s policy meeting, where a 50-bps rate hike appears certain, but is a higher hike possible to fight the surging prices? Inflation is having a significant impact on market sentiment, as rising prices in several categories noted today in the CPI (energy, utilities, used cars, food, and shelter) heighten fears of reduced spending going forward in consumer discretionary, and were among hardest hit today (cruise, restaurants, casinos, theme parks, hotels, and travel). Following today’s “hotter” CPI report, the September rate hike pause is now in doubt. Fed Fund Futures are now pricing in a 50-bps rate hike at each of the June, July, and September FOMC policy meetings, adding to the 75-bp of tightening that has already been implemented. So, at end of day, markets concluded that: 1) we have no yet reached peak inflation, 2) the Fed is likely not pausing in September after June/July rate hikes with a 50-bps hike now expected in September and 3) there is more uncertainty regarding a “soft landing” by the Fed for the economy (in addition to ongoing China, Russia macro concerns). Consumer sentiment meanwhile tumbled to record lows as tracked by the University of Michigan prelim figure at 50.2. For the week, all the three major indexes are down between 4.2% and 5.2% as rate-sensitive growth stocks came under pressure from elevated Treasury yields and more earning signs in the retail sector after Target (TGT) warned of slowing margins earlier in the week. Note for Q2 2022, 71 S&P 500 companies have issued negative EPS guidance and 31 S&P 500 companies have issued positive EPS guidance. Note the Dow is now down 10 of last 11 weeks, a streak not seen since the Great Depression – CNBC.

Economic Data:

·     Consumer Prices (CPI) for May rose +1.0% vs. est. +0.7% M/M and jumped +8.6% Y/Y (a new 40-year high reading), topping the +8.3% estimate. Core CPI (ex food & energy) rose +0.6% vs. expected rise of +0.5% M/M and rose +6.0% vs. +5.9% Y/Y – “hotter” reading than expected for inflation. Price increases last year (CPI report): Fuel Oil: +106.7%, Gasoline: +48.7%, Gas Utilities: +30.2%, Used Cars: +16.1%, New Cars: +12.6%, Electricity: +12.0%, Food at home: +11.9%, Overall CPI: +8.6%, Transportation: +7.9%, Food away from home: +7.4%, Shelter: +5.5%

·     University of Michigan surveys of consumers sentiment prelim falls to lowest level ever tracked (since 1978 as per CNBC) as June reported 50.2 (below consensus 58.0) and final May 58.4 – lowest level prior to today was 51.7. The current conditions index prelim June 55.4 (below consensus 62.5) and final May 63.3 and expectations index prelim June 46.8 (consensus 54.5) vs final May 55.2.

Commodities

·     Choppy oil price action ends with WTI crude falling -$0.84 or 0.69% to settle at $120.67 per barrel, off morning lows of $118.33 (but off highs $122.75) tracking broader stock markets lower following data showing U.S. annual consumer inflation jumped to a 40-year-high 8.6% in May led by soaring prices for gasoline and other energy-related items. The unexpectedly large jump in inflation boosts the odds of a 50bp Fed hike in September following likely 50bp hikes both this month and in July, and that could slow down the economy and weaken oil demand. The average price of gasoline hits new record of $4.99 per gallon today as per AAA. Weekly Baker Hughes rig count data showed drilling rigs targeting crude oil in the US rose by 6 to 580, gas rigs were unchanged at 151 and total rigs rose by 6 to 733

·     Gold prices bounced back, rising $22.70 or 1.2% to settle at $1,875.50 an ounce (after hitting lows of $1,826.50 an ounce this morning initially after the CPI data), posting a 1.4% advance for the week. Gold’s fate next week may hinge on the Fed meeting at this point.

Currencies & Treasuries

·     Zero let up in Treasury sell off as yields pushing to new highs – 10-yr above 3.17%, the 2-year rising as much as 20-bps to 3.03% highs, keeping stocks under pressure on rising rate hike expectations by the Fed after the CPI report. The dollar rose about +0.9% vs. Euro which is down to 1.052; British Pound -1.35% at 1.2323 and Aussie dollar down -0.7% at 0.70. U.S. bond funds see biggest weekly outflows in four weeks as. Bond yields jumping globally as German 10-year yield rises to 1.50% for first time since 2014 and Italy’s 10-year government bond yield rises to highest since 2014 at 3.784% as the ECB sounded more aggressive in its rate fight this week.

Sector News Breakdown

Consumer

·     Retailers; SFIX slides as analysts note the co is still having issues onboarding new clients, resulting in revenues that are now declining YoY- Q3 was in-line with guidance on the top line (-8% vs. outlook down 7-10%) but missed on the bottom line and Q4 sales are planned down 13-15%; KTB downgraded from Buy to Neutral at Goldman and cut tgt to $41; RENT beat 1Q EBITDA on higher revs/subs, and reiterated its projected timeline to adj. EBITDA profitability in 2-4 quarters

·     Consumer Staples; PM shares outperform as investors look to defensive plays such as tobacco that pay good dividends; food and beverage names hold up better amid defensive nature, while restaurants hit by slowing spending fears on rising inflation; COTY says it plans to gradually restart shareholder returns as it reduces debt as plans $200 mln stock buyback in 2024 (had stopped shareholder returns with a suspension of its dividend during the early months); RBC Capital takes a look at recent trends in the hard seltzer (implications for SAM) saying category sales are down -7% in IRI, with QTD trends (through 5/29) worsening to down 12% and numerator Data would also suggest softer trends; REV plunges after report of potential bankruptcy filing next week https://bit.ly/3HacBuO

·     Casinos, Gaming, Lodging & Leisure sector; Surging inflation having an impact on market sentiment, as rising prices in several spending categories raising fears of reduced spending going forward as consumer discretionary, travel, leisure among hardest hit today; cruise lines extend recent losses (CCL ), while hotels (MAR ), online travel (EXPE ) and casinos (WYNN ) all decline dip

Financials

·     Bank movers; unrelenting selling pressure in banks and insurance names amid surging yields and rising recession fears; impacting some of the biggest banks today including WFC (52-week lows), JPM, Citi, and regional banks as well (FITB), while insurers also felt pain (LNC ); Fintech and payments also fall on fears of reduced spending (MA, V )

·     Asset managers with monthly AUM data: AB reports preliminary AUM $687B as of May 31, up from $685B at the end of April as increase was due to firm-wide net inflows and slight market appreciation; APAM prelim assets under management as of May 31, 2022 totaled $144.0 billion; BEN prelim month-end AUM of $1,445.9 billion at May 31, 2022, compared to $1,455.8 billion at April 30, 2022; IVZ reported preliminary month-end assets under management of $1.4516B, a decrease of 1.7% versus previous month-end (experienced net long-term outflows of $2.4B in the month); TROW preliminary month-end assets under management of $1.40 trillion as of May 31, 2022; VCTR reported assets under management (AUM) of $166.9 billion as of May 31, 2022.

·     Mortgage Lending & Consumer Finance; RDFN said sales of luxury US homes fell almost 18% during the three months ending April 30, compared with a year earlier, marking the largest drop since the start of the pandemic. At the same time, the median sale price of luxury homes rose almost 20% to $1.15M

Healthcare

·     Pharma movers; for BLUE, an FDA advisory committee has unanimously recommended the approval of Bluebird Bio’s experimental gene therapy — voting 15-0 that its ability to help children with cerebral adrenoleukodystrophy outweighs a demonstrable risk of causing cancer; CTIC disclosed data for its FDA-approved therapy pacritinib from patients with myelofibrosis and thrombocytopenia; GSK said that its respiratory syncytial virus, or RSV, vaccine candidate showed a statistically significant and clinically meaningful efficacy in adults aged 60 and over

·     Biotech movers; BGNE receives approval in China for head/neck cancer subtype, saying the approval was backed by data from a phase 3 trial called RATIONALE-309; CRBU reported additional initial data from a phase 1 trial of its CAR-T cell therapy CB-010 to treat patients with relapsed or refractory B cell non-Hodgkin lymphoma; BPMC downgraded to a Sell at Citigroup and lowers tgt to $41 from $68 saying re-arrangement of primary endpoints highlights concern with respect to the size of the Ayvakit ISM market; FULC tumbled after the clinical-stage pharma shared proof-of-concept data from an ongoing Phase 1b trial for oral experimental therapy FTX-6058 in sickle cell disease

·     Healthcare Services & MedTech Equipment; ILMN said Sam Samad will depart on July 8 after having been CFO for more than 5 years – DGX announced Mr. Samad will join as CFO on July 11, 2022

Technology, Media & Telecom

·     Internet & Media: Goldman Sachs cut its recommendation on NFLX, RBLX and EBAY to sell from neutral, partly due to a weaker macroeconomic environment; LAMR downgraded to Equal eight and IHRT cut to Underweight at Morgan Stanley while lowering advertising estimates and tgts for OUT, IPG, OMC, CCO as see rising risk that ad budget growth will slow and perhaps dramatically in ’23 – see better risk/rewards in other areas of our coverage group that have less cyclicality

·     Semiconductors; AMD held its 2022 Investor Day yesterday, the Company’s first in person event since March 2020 as it now believes that its 2025 TAM has grown to roughly $300 billion, highlighted its 5nm and 4nm Zen 4 architecture and provided a glimpse towards the next generation 4nm and 3nm Zen 5 architecture; TSM May sales marked a new monthly high at NT$185.7B, up 8% M/M and 65% Y/Y, besting April’s record of NT$172.6B.

·     Software movers: DOCU shares fall after Q1 EPS miss of $0.38 vs est. $0.46 on revenue of $588.7M, up 25% y/y (vs. est. $582.9M), a deceleration from 35% y/y in Q4 (4^th straight deceleration) and billings of $613.6M up 16% y/y, a deceleration from 25% in Q4; SCPL upgraded to Outperform with $17 tgt at Wedbush saying several growth drivers could ultimately enable SciPlay to comfortably surpass the Street’s expectations for the next few years, including Alictus and the ad business; EA downgraded to Neutral from Buy at MoffettNathanson

·     Hardware, Components & Services; for AAPL and SSNLF, Cowen said following their downward revision of CY22 smartphone shipment growth to 1% Y/Y last month, latest field work suggests full year units could be flat to down slightly Y/Y depending on C2H shipments; for NET 13G Filed by BlackRock for 4.9% stake; CMTL shares slide after in-line Q3 results were followed up by weaker Q4 outlook as sees 4Q net sales about $123Mm vs est. $157Mm and FY net sales about $482Mm vs est. $517.3Mm; DOCN at its analyst day, issued targets for $1B+ in revenue in 2024, a 33% CAGR over three years, with 20%+ FCF margins