Closing Recap

Tuesday, September 20, 2022

Equity Market Recap

·     U.S. stocks failed to gain traction after yesterday’s gains, pressured most of the day with Treasury yields spiking along with the dollar as the third straight 75-bps interest rate hike is expected by the Fed tomorrow to a range of 3% to 3.25% as their battle with rising inflation wages on. Higher rates have pummeled markets in 2022, putting stock and bond prices into reverse after a multiyear run-up driven in part by low interest rates. Also, of late, downbeat corporate updates from big businesses such as FedEx and Ford as well as a handful of material and metal companies have added to the market worries about an impossible “soft landing” for the economy. Today, the Atlanta Fed GDP forecast was lowered to +0.3%. If it goes negative in Q3, would three consecutive GDP declines be defined a recession? There were a few pockets of strength in an overall dismal day with defense stocks (BA, LMT, NOC), and agriculture names rally. A handful of tech giants also helped keep markets afloat with AAPL and TSLA higher most of the day.

·     Fed preview (ahead of FOMC meeting tomorrow): 1) Citi sees 75bps hike this week, followed by 50bp hikes in November and December and a 25bp hike in February – although stronger jobs or inflation data could result in a fourth consecutive 75bp hike in November. 2) Deutsche Bank said while a 100bp rate increase is possible next week, we instead expect the Committee to follow through on their pre-meeting signals and deliver a 75bp rate hike at the September FOMC meeting. 3) Morgan Stanley said expect the FOMC to raise rates by 75bp at its September meeting and upwardly revise the projected peak rate to 4.1% at end-2023, and we continue to see rate cuts beginning in 2024. 4) Bank America expects the Fed to raise its policy rate by 75bp in September to 3.0-3.25% and project the Target range for the federal funds rate to reach 3.75-4.0% by year-end." This would be 50bp higher than in June. We also look for the median member to project one additional 25bp hike in 2023, bringing the new terminal rate to 4.0-4.25%.

Economic Data:

·     Housing Starts for August rose +12.2% M/M to 1.575M vs. 1.440M expected and 1.404M prior (revised from 1.446M); but Building permits dropped -10.0% M/M to 1.517M vs. 1.621M expected and 1.685M prior (revised from 1.674M). August single-family starts +3.4% to 935,000-unit rate; multifamily +28.0% to 640,000-unit rate

Commodities

·     Oil prices finish lower, with WTI crude -$1.28 or 1.49% to settle at $84.45 per barrel. Prices fell from earlier highs of $86.45 per barrel and remain in a downdraft on recession fears in the US, slowing demand concerns and a stronger dollar. A few key energy events over the last 24-hours: Scotland’s reactor went offline, Germany ISAR 2 nuclear power plant had a reactor leak, and Venezuela had a refinery fire. Gold prices slide again, down -$7.10 or 0.4% to settle at $1,671.10 an ounce as the stronger dollar and rising Treasury yields pressure commodity prices. Natural gas prices finish at a six-week-low for a third straight session, falling -0.5% at $7.717/MMBtu.

Currencies & Treasuries

·     The US dollar rose again, back on track near 20-yr highs ahead of expectations of another aggressive rate hike by the Federal Reserve. The two-day FOMC kicked off today with rate futures traders pricing in an 81% chance of a 75-basis point hike and a 19% probability of a 100 bps of tightening ahead of tomorrow’s official announcement. The dollar index (DXY) remains on track for its fifth weekly gain in six, back above the 110 level and not far from 110.79, a level hit earlier this month for the first time since June 2002. The euro dropped back below parity; the British Pound back down below $1.14 (lowest since 1985) ahead of the BoE rate decision Thursday. The Japanese yen has pulled back off 24-year lows around 145 vs. the dollar recently. Canadian dollar at 2-yr lows vs Buck at 1.3362 following softer inflation data – Canada saw a solid drop in headline CPI, falling to 7% below the 7.3% consensus, and down sharply from the prior 7.6% print.

·     Treasury yields another amazing move, with the 10-year yield hitting above 3.6% (rising as much as 10-bps), highest since 2011 and the 2-yr almost at 4% (highest since 2007) as investors positioned for another aggressive rate hike by the Fed tomorrow and aggressive outlook on future rates (though yields faded well off intraday highs). Note yesterday, the 2s and 10-year yields hit 52-week highs on the same day yesterday for the first time since June. In a great recap, here are the massive jump in Treasury yields from the close of 2021 (as per Charlie Bilello): 1-Mo: 0.06% –> 2.62%; 3-Mo: 0.06% –> 3.37%; 6-Mo: 0.19% –> 3.87%; 1-Yr: 0.39% –> 4.05%; 2-Yr: 0.73% –> 3.95%; 3-Yr: 0.97% –> 3.90%; 5-Yr: 1.26% –> 3.69%; 7-Yr: 1.44% –> 3.62%; 10-Yr: 1.52% –> 3.49%; and 30-Yr: 1.90% –> 3.52%. Path of least resistance remains to upside for yields.

Sector News Breakdown

Consumer

·     Retailers: NKE downgraded to Equal Weight from Overweight at Barclays; OXM raises FY22 adjusted EPS view to $10.25-$10.60 from $9.60-$10.00 (est. $10.02) and raises FY22 revenue view to $1.38B-$1.41B from $1.29B-$1.33B (est. $1.31B); PTON said it begins taking preorders for its $3,195 rowing machine; deliveries will begin in the US in December; IRBT slips after AMZN get additional request for info from FTC on merger deal; GPS said it is eliminating about 500 corporate jobs, to protect margins and as battles weak sales.

·     Auto sector: Ford (F) reaffirms full-year adjusted Ebit guidance of $11.5-$12.5b; expects to have about 40,000 to 45,000 vehicles in inventory at end of Q3 lacking certain parts presently in short supply; but anticipates Q3 adj Ebit of between $1.4B-$1.7B below ests. $2.98B, crushing shares; BWA to acquire charging business of Hubei Surpass Sun Electric; AMZN backed Infinium said it will supply low carbon electrofuels for the e-commerce giant’s trucking fleet starting next year; HTZ plans to order up to 175,000 EVs from GM over next five years

·     Consumer Staples & Restaurants: DRI earnings expected later this week, as Oppenheimer said they identify upside potential if we assume DRI fully captured the stronger industry SSS observed in August; PZZA tgt cut to $100 from $120 at Stifel saying checks indicate the pizza category continues to struggle with transaction performance, despite the more intense promotional activity and believe quick-service pizza may report the weakest SRS performance of any restaurant category during 3Q (also watch DPZ)

·     Casinos, Gaming, Lodging & Leisure sector: casinos WYNN, MLCO, LVS among early gainers after China’s government issued draft rules aimed at making it easier for some foreigners to enter China for visits to tourism sites along the Chinese border. Separately, Macau GGR tracking 30% higher in September despite post-holiday slowdown (according to Inside Asian Gaming); in cruise lines, NCLH upgraded to buy from Hold with $19 tgt while remain Hold on RCL (tgt to $58 from $65) and CCL remains Sell rated but up tgt to $10 from $8 – though notes would have liked to have seen several more months of consistent revenue improvement data before upgrading

Energy

·     Energy stock movers: TELL shares tumble after saying due to uncertain conditions in the high-yield market, it has withdrawn its proposed public offering of units consisting of 11.25% senior secured notes due 2027 and warrants to purchase shares of Tellurian common stock; in pipelines: SMLP said continue to expect to trend toward high end of our 2022 adjusted EBITDA guidance range of $205 mln to $220 mln

Financials

·     Financial Services, Consumer Finance & Lending: OPEN lost money on 42% of its Aug resales according to new data, per Bloomberg; MA, Visa (V) and AXP face calls from GOP Attorneys general to abandon gun-shop code saying that the card companies’ plan could lead to the misuse of consumer data and wouldn’t protect the public, the WSJ reported

·     FinTech & Payments; PYPL downgraded to Neutral at Susquehanna and cut tgt to $100 owing to factors including margin pressure – said Braintree is likely to continue driving PYPL as a whole, its unit economics may drag on PYPL consolidated results; Wells Fargo said in deep dive on B2B Payments, thinks the area will continue to grow due to secular tailwinds, notwithstanding a potentially weaker macro environment; sees BILL, FLT, FLYW, GPN as share gainers

·     Bitcoin: late yesterday, COIN said it will implement a new fee structure on Sept. 20 at about 5 pm ET "to account for changes in global crypto trading volumes and asset prices"; MSTR disclosed in a regulatory filing that it had acquired an incremental ~301 bitcoins for $6mm in cash at an average price of $19,851 per coin including fees and expenses – bringing position to ~130,000 Bitcoins valued at ~$2.5bn

·     Chamath Palihapitiya has decided to wind down a pair of tech-focused blank check acquisition companies (SPACs) after failing to find adequate merger targets. The SPACs being closed are called Social Capital Hedosophia Holdings Corp. IV (IPOD) and Social Capital Hedosophia Holdings Corp. VI (IPOF)

Healthcare

·     Pharma movers: MRK said to initiate new phase 3 clinical program with lower dose of daily oral islatravir in combination with doravirine for treatment of people with hiv-1 infection; RCKT to acquire RCOR in an all-stock deal, with an implied value of $2.60/share (vs. $1.90 last), giving Rocket a pipeline of AAV based gene therapies focused on cardiac conditions. RCOR shareholders to receive 0.1676 shares of RCKT, for an implied deal value of $53M deal; AVRO said the FDA granted rare pediatric disease designation to AVR-RD-04, an investigational gene therapy for the treatment of cystinosis; Citigroup adding ASND to Focus List, replacing IONS

·     Biotech movers: Citigroup opens upside catalyst watch on ALNY heading into additional APOLLO-B data, including subgroup analyses and echocardiographic results, is set to be presented at the Heart Failure Society of America meeting on September 30; SPPI falls after the FDA staff raised concerns over the safety of its experimental cancer drug and questioned the benefits it provided over existing therapies – Reuters; UTHR shares slipped after terminating its late-stage study of its drug candidate, Tyvaso Inhalation Solution

·     MedTech Equipment; MDT receives FDA clearance for expanded indication of LINQ II(TM) insertable cardiac monitor for use in pediatric patients ages 2 and older; ZBH receives FDA clearance for identity™ shoulder system for shoulder replacement; SYK receives FDA clearance for OptaBlate™ Bone Tumor Ablation System

·     Healthcare Services: CHNG rises after UNH’s pending acquisition of Change Healthcare won court approval, with the Justice Department losing in its attempt to block the deal. Recall UNH originally announced its acquisition in Jan 2021; HUM upgraded from Equal Weight to Overweight at Morgan Stanley and raise tgt to $549 from $494 on the strength of their expected 2023 MA benefit richness which could more than double Individual MA membership growth in 2023 (+10% y/y 2023E vs. +4% y/y 2022E)

Industrials & Materials

·     Industrials, Aerospace & Defense; BA rises early on headlines they held talks with China regulator on 737 Max comeback; defense stocks in general (LMT, NOC) advanced as Ukraine/Russia headlines intensified; LDOS awarded a new Blanket Purchase Agreement by the U.S. Department of Transportation to provide program and technical support to the Federal Highway Administration’s Office of Policy and Governmental Affairs (est. value $60M); APOG reports Q2 adj EPS $1.06 vs. est. $0.83; Q2 revs rose 14% to $372M vs. est. $344.6M; raises year EPS view to $3.75-$4.05 (from prior $3.50-$3.90) and vs. est. $3.66 and year revs to grow 8%-10%

·     Transports: Rail carload data showed total traffic +0.9% y/y, decelerating versus +2.8% y/y in week 36. Intermodal volumes were -3.4% YoY, decelerating from +2.8% YoY last week. Ex-intermodal volume growth of +5.2% YoY accelerated versus +2.7% YoY. For Week 37, KSU had the best intermodal traffic at +19.4% YoY (vs. CSX -1.9%, UNP -4.9% and NSC -8.1%)

·     Timber & Paper sector: WY downgraded to Neutral from Buy and LPX downgraded to Underperform from Neutral at Bank America citing reduced operating rate and pricing forecasts across key wood products to reflect the firms housing and building product views. Operating rates in 2023 look like they’ll "pierce" 80%, which will put more downward pressure on the sector’s products, and says oriented strand board looks worse than other products

·     Chemicals: guidance continues to disappoint in the sector as OLN the latest to guide lower, seeing Q3 adj EBITDA $530M-$550M, below consensus of $619.8M; HUN downgraded from OW to EW at Wells Fargo and cut tgt to $28 from $35 given a large cut to their EBITDA outlook for 2022E and 2023E, citing weakening demand across key segments; in lithium space, LAC said it has partnered with another North American-focused lithium company (Green technology Metals) to develop an integrated lithium chemical supply chain in the region; Yara said it will halt production of its Belgian unit "in the next days," as part of its general European reduction strategy due to soaring energy prices, Reuters reported

Technology, Media & Telecom

·     Semiconductors: NVDA held its investor day today introducing new chips; WDC downgraded to Hold from Buy at Deutsche Bank as believe WDC’s F1Q revenue and EPS are tracking below the low end of guidance, and F2Q (Dec) outlook are also likely to be meaningfully below current Street estimates; ON discloses plan to wind down a division within its Advanced Solutions Group that accounted for less than 3% of the co’s consolidated revenue

·     Software movers: MSFT boosted its dividend by 10%; ZEN announced that its stockholders voted Monday to adopt the merger agreement whereby Zendesk will be acquired by a consortium led by Hellman & Friedman and Permira for $77.50/share in cash; TCEHY is looking into shedding more of its huge investment portfolio as the Chinese social-media and videogame company tries to fund a series of share buybacks/refocus its growth strategy – WSJ https://on.wsj.com/3f5MriD ; ESTC held investor day yesterday where mgmt said is confident in its $2B FY25 rev Target

·     Hardware, Components & Services; CGNX raises Q3 revs to $195M-$205M, from prior $160M-$180M; OUST said that it is initiating a comprehensive cost-reduction process across its business, streamlining its cost structure, including a 10% reduction in staff, and extending its expected cash runway; INVZ rises after JPMorgan initiated coverage with Overweight and $22 tgt and forecast a strong revenue ramp in 2H of this decade, led by an industry-leading order book size of $6.6 bn+

·     Telecom movers: for cable (CMCSA, CHTR, CABO), UBS said they expect 3Q to show continued pressure in cable broadband net adds as activity remains muted while competition ramps up with FWA adds likely hitting new highs. They expect cable adds to be barely positive in 3Q vs. +586K a year ago and expect this trend to continue until we see an improvement in the switching Pool or a pullback in competition. They expect telco trends to remain stable (DSL losses continue to offset fiber adds) while FWA adds grow to 870K (up from 825K in 2Q)