Closing Recap

Wednesday, March 01, 2023

Equity Market Recap

·     US equities faced early pressure today and failed to sustain rally attempts throughout the afternoon as investors continued to absorb the Fed’s higher-for-longer mantra. Today we heard from Fed speakers Kashkari and Bostic. Kashkari emphasized his concern that hikes so far have yet to bring down services inflation and that addressing inflation remains the priority even if it results in recession. Bostic reiterated his believe the policy rate needs to be raised to the 5.00-5.25% range and indicated it will need to remain at that level well into 2024. The market finally seems to be paying attention, as futures priced in a policy rate in the 5.5-5.75% range by September. The S&P 500 hung to its key 200-day moving average support most of the day, closing just above the 3,940-support level, continuing to test that level.

·     Similarly, @KobeissiLetter highlights a 40% chance rates rise to 5.75% by July and a 13% chance rates hit 6% or higher. A month ago, the odds of rates moving above 5.5% were zero. In other data highlights, mortgage demand dropped to a 28-year low, prices at the pump dipped 4.1% in February (largest February decline since 2006) and, according to @bespokeinvest, 20 percentage points separates the year-to-date best and worst performing sectors (Consumer Discretionary and Utilities, respectively). At this point last year, the gap was double that. @RenMacLLC highlights the inconsistent market action relative to the bearish narratives, mentioning a Consumer Discretionary leader and Utilities laggard typically do not represent bearish price action.

·     Sector-wise, heading into the final hour of trading, interest-rate-sensitive sectors Real Estate (XLRE, -1.44%) and Utilities (XLU, -1.54%) were primary laggards. Consumer Discretionary (XLY, -1.2%) and Consumer Staples (XLP, -1.0%) were also slipping at least 1%. Energy (XLE, +2.18%), Materials (XLB, +0.74%) and Industrials (XLI, +0.35%) were the only gainers led by better manufacturing data out of China. In terms of style buckets, Value outpaced Growth but both were in the red with Value -0.42% and Growth -0.78%. Breadth was only modestly negative with decliners over advancers by 1.4:1, while there were 196 new lows vs 181 new highs.

Economic Data:

·     U.S. ISM manufacturing contracted for a fourth straight month in February, little changed at a reading of 47.7 last month from 47.4 in January and vs. the consensus view of 48.0. Orders for key manufactured capital goods rose by the most in five months in January (to 47.0 from 42.5) while shipments of those so-called core goods rebounded. Prices paid by manufacturers rebounding to 51.3 in February from 44.5 in January.

·     S&P Global February final manufacturing PMI at 47.3 (vs flash 47.8), the 5^th straight reading of under 50 (contractions/expansion level).

·     Construction spending for January falls (-0.1%) vs. est. +0.2% to $1.826 trln, vs Dec -0.7%; Jan private construction spending unchanged, public spending (-0.6%).

·     In Europe, inflation remains stubborn as German data showed prices in the region’s largest economy rose 9.3% y/y in February, above Jan +9.2% and estimates of 9% – reading comes a day after data showed prices rising faster than expected in France and Spain, challenging the view that inflation in the region had clearly peaked (rising expectations the ECB could boost rates next meeting by 50-bps instead of 25-bps).

·     Asian markets jumped overnight, initially lifting US and European markets in turn after China’s factory sector grew in February at the fastest pace in more than a decade in a boost for global economy recovery hopes, China’s manufacturing purchasing managers’ index (PMI) climbed to 52.6 last month against 50.1 in January, while a private sector survey also showed growth for the first time in seven months (rising to 51.6 from 49.2 prior). Non-Mfg. PMI rising to 56.3 from 54.4, the highest level since April 2012.

Commodities, Currencies & Treasuries

·     Oil prices with a midday reversal, settling higher on the day as WTI crude gained $0.64 or 0.83% to finish at $77.69 per barrel (off lows $76.12) and its best levels in 2-weeks, while Brent Crude futures settle at $84.31/bbl, up 86 cents, 1.03% (off lows $82.61). Weekly inventory data marked a 10th straight weekly rise, but the smallest weekly increase in five weeks. Natural gas prices climb for a 6^th straight day, 2.3% higher at nearly five-week-high $2.811/MMBtu.

·     Gold prices rise $8.70 or 0.47% to settle at $1,845.40 an ounce, getting a boost as the dollar index (DXY) slid -0.4% to 104.45, with the euro rising vs. the buck after “hotter” German CPI data overnight. Treasury yields finished near the top end of the daily range, with the 10-year at 3.99% after topping 4% briefly for the first time since November, while the 2-year yield was at 4.88%, hitting its highest levels since 2007. Yields extended gains as a slew of strong U.S. economic data in recent weeks raised market expectations that the Fed has further to go in hiking rates.

Sector News Breakdown

Consumer

·     Retailers: ROST reported 4Q EPS of $1.31 above $1.23 est. due to stronger sales and lower incentive costs; comps inflected to +1% and introduced F23 guidance of flat comps (vs -4% in F22), OM of 10.3-10.7%, and EPS of $4.65-4.95 (vs. est. $4.93); KSS Q4 EPS loss of (-$2.49) vs estimates for gain, gross margins fell by 1,016 basis points (markdowns and higher costs) and forecast annual sales and profit below estimates (sales +2%-4% vs. est. +0.7%); URBN mixed Q4 results with EPS miss and sales beat; Discount retailer DLTR guides full-year EPS between $6.30-$6.80, below consensus of $7.78 and says it expects gross and operating margins to decline in the first half of FY2023 (DLTR 3-year stacked comp +16%, Family Dollar +17%, well below Walmart +24%, Target +32% & Kroger +21%); KTB upgraded to Buy at Stifel which reflects evidence of standout brand momentum, mkt share gains in both denim and non-denim styles.

·     In autos: TSLA hosted its Investor Day today; RIVN narrowed its quarterly loss but missed revenue expectations ($663M vs. est. $742M) and guided for production of 50,000 vehicles in 2023, below some views; XPEV reported vehicle deliveries for February of 6,010 units, rising 15% m/m; LI reported vehicle deliveries for February of 16,620 units vs. 8,414 y/y. in EV charging, BLNK Q4 revs $22.6M vs. est. $19.3M; says operating expenses rose 67% y/y to $34.2M; sees FY23 revs $100M-$110M vs. est. $91.6M. NIO falls early on earnings and deliveries.

·     In consumer staples: in tobacco, PM upgraded from Neutral to Buy at UBS and raise tgt to $116 driven by an acceleration of HTU shipment growth in mature markets, an expanding value-mainstream heated tobacco offering and Swedish Match’s accretive growth and margin profile; in products, PG upgraded to Buy at UBS and raise tgt to $163 noting it has been the worst performing stock across their HPC coverage universe YTD; in food, BGS after Co forecasts 2023 profit above estimates; GO posts Q4 beat but lower guidance; in beverages, MNST reported a 480 bps 4Q organic sales miss and 9% EPS miss, which was a disappointment, with US org sales growth of only +2.3%, well below the +11.4% consensus.

·     In Housing and Building: home retailer LOW Q4 adj EPS $2.28 vs. est. $2.21; Q4 sales rose 5.2% y/y to $22.45B vs. est. $22.73B; forecast full-year sales below market expectations as sees FY total sales of $88B-$90B vs. est. $90.8B and EPS $13.60-$14.00 vs. est. $13.79. BLDR downgraded to Market Perform at BMO saying while Q1 guidance is better than expected, there is uncertainty around the extent of slowdown in new residential construction, especially in H2. Weekly Mortgage Bankers Assoc (MBA) data shows mortgage market index falls 5.7%, purchase index falls 5.6%, and refinancing index falls 5.5% as the 30-yr mortgage rate rises 9 bps to 6.71%. Flooring company LL tumbles following its quarterly results.

·     In leisure, travel, and restaurants: movie theatre chain AMC posts its 14^th straight quarterly loss; in casinos (WYNN ) Macau’s February Casino Revenue rose 33.1% y/y vs. est. 31%; in travel, SABR announces new CEO change. in restaurants: WEN guides 2023 sales growth of 6% to 8%, above estimate of 3.8%, after Q4 sales and profit beat estimates on robust demand for hamburgers and chicken nuggets; other movers off earnings were JACK, RRGB, and DIN.

Energy

·     Energy stocks were the clear leaders in the S&P 500 index, with the XLE up over 2%. Weekly inventory data bearish again as the American Petroleum Institute last night reports 10th straight weekly crude build; Crude +6.203mm (+350k exp); Cushing +483k, Gasoline -1.774mm and Distillates -341k.

·     In solar, FSLR and SHLS both upside earning: FSLR reported in-line 4Q results and released 2023 guidance that came in above consensus which highlights ongoing operational momentum and margin expansion trajectory after 2022 struggles; SHLS 4Q adj EPS $0.15 vs est. $0.09 on revs $94.7Mm vs est. $86Mm, adj EBITDA $30.1Mm vs est. $22.2Mm; guides FY revs $470-510Mm vs est. $506Mm, adj EBITDA $140-155Mm vs est. $153.6Mm, adj net Inc $87-97Mm.

Financials

·     Banks: JEF CEO and president said expects capital markets to improve in the second half of 2023, and new deals in a moderately healthy manner" around the middle or end of this year, as per Reuters. FHN shares tumble. FHN shares fall after TD Bank said it doesn’t expect it will receive regulatory in time to complete its $13.4 billion acquisition by May 27. TD can’t provide a new close date at this time, according to a 10-K filing on Wednesday.

·     In FinTech & Payments: MQ shares slide following a softer-than-expected ’23 guide (expected gross profit growth in the "low 20’s" vs the prior 29% modeled by the Street, though SQ’s renewal will continue to be in focus.

Healthcare

·     Biotech: vaccine maker NVAX tumbles after warning it may not have enough cash flow to last more than a year as losses come in more than double what Wall Street expected (EPS loss -$2.28 vs. est. -$0.92); also named a new chief executive. SRPT shares jump on earnings results and after the FDA said they will not hold advisory committee for investigational gene therapy, SRP-9001, to treat DMD – grants priority review and will decide approval 5/29. CYTK receives complete response letter (CRL) from FDA for new drug application for Omecamtiv Mecarbil; TVST 10.87M share Spot Secondary priced at $11.50.

·     Pharma: RETA shares surge after the FDA approved its treatment for Friedreich’s ataxia. The drug, omaveloxolone, is now called Skyclarys and has been approved to treat adults 16 and older with the degenerative disease; LLY cuts insulin prices by 70% and caps patient insulin out-of-pocket costs at $35 per month; MRK says Keytruda trial met main goal as perioperative therapy in lung cancer; VRTX in pact with IMGN to expand gene editing reach. LRMR active as FDA approved peer Reata’s (RETA) Skyclarys for treatment of Friedreich’s ataxia in patients >16yrs.

·     Healthcare Services: FIGS slides after sales guidance fell short of consensus expectations – posted beat on top and bottom line for Q4 but sees FY23 revenue mid-single digit growth vs. est. $560.64M and guides FY23 adj EBITDA margin 11%-12%; GDRX posted a solid top- and significant bottom-line beat with adj. EBITDA margins of 26.9% handily beating consensus of 22.4%; HCAT reported a top- and bottom-line beat with total revenues topping consensus by ~1% and an adjusted EBITDA loss coming in at 50% of what consensus had expected.

·     In MedTech: MASI 4Q22 revenue and EPS beat consensus and raised its 2023 revenue and EPS guidance driven by improved operations and a lower expected currency headwind in 2023. Agilent (A) beat estimates and raised guidance while announced $750M capital expansion around its leadership position in small interfering RNA (siRNA) production for human therapeutics. OMCL posted a solid top- and bottom-line beat with 4Q revenues topping consensus by 3.4% and adj. EBITDA beating consensus by an impressive 67% – but l-t guidance came in softer.

Industrials & Materials

·     Aerospace & Defense; aero parts maker SPR downgraded to Market-Perform at Bernstein and lower tgt to $38 citing a lower outlook for margins and cash flow, as they have higher concerns regarding the company’s operational performance. SPCE shares slide after Q4 results.

·     In industrials: MMM said the U.S. Department of Defense’s records show that the "vast majority" of claimants in Combat Arms earplug litigation have normal hearing under accepted standards. The DoD records are for more than 175,000 plaintiffs; DY shares surge after Q4 EPS $0.83 vs. est. $0.13; Q4 revs $917.5M vs. est. $814.2M; expects contract revenues for the quarter ending April 29, 2023, to increase mid- to high-single digit. CAT shares rise after co reaches tentative labor union deal, averting possible strike.

·     In Chemicals: KeyBanc said they remain bullish on the coatings space (AXTA, PPG, RPM) and see it as one of the more attractive groups within chemicals. However, believe taking a selective approach based on end-market exposure and geographies is prudent at the current juncture. Notes the names that stand out to them in this bucket are AXTA and PPG. And say they see a favorable risk/reward in the short term for RPM and long-term secular tailwinds.

Technology, Media & Telecom

·     Media & Internet: U.S. listed Chinese stocks (BIDU, BABA, PDD, NTES, JD) advance after strong PMI numbers from China; the Caixin Manufacturing PMI measure saw a return to expansion in February, rising to 51.6 from 49.2 prior and Non-Mfg. PMI hits highest since April 2012 at 56.3. In ad marketing technology, PUBM reported 4Q22 revenue and EBITDA that both came in below the low end of guidance as display revenue fell 50% Y/Y in December.

·     In Semiconductors: NVDA files $10B mixed shelf; AMBA reported in line F4Q (Jan) results and guided F1Q (Apr) meaningfully below expectations ($62M mid-point vs. $77M est.), as the inventory correction particularly within IoT worsens while there were no significant new CV3 announcements (downgraded to Neutral at RothMKM after results); QCOM CEO tells CNBC that the co had told investors in 2021 that it thought it wouldn’t be providing iPhone modems this year, before Apple decided to continue the relationship for another year, but also notes that next year’s setup is "[Apple’s] decision to make."

·     In software: DUOL reported a solid quarter, with meaningful momentum across engagement metrics (DAUs +61% y/y) and guidance came in materially above expectations; PWSC 8.7M share Spot Secondary priced at $21.00. In hardware: HPQ reported Q4 EPS inline on weaker revenues and better margins and reaffirmed FY 23 EPS and FCF guidance, despite a weaker revenue outlook and higher OI&E expense.