Mid-Morning Look

Friday, July 01, 2022

U.S. stocks kicking off the 2H of the year with weak economic data, choppy markets, and light volume ahead of the long 3-day holiday weekend as investors try to put an abysmal 1H in the rear-view mirror. Stock markets fail to hold early gains, falling to lows while bond markets are extremely volatile, as U.S. Treasury 10-year yields falls to four-week low below 2.80%, down over 17 bps (a stunning decline in 2-weeks from 3.50% to 2.8%) following weaker economic data (ISM and construction spending miss). Semiconductors leading the declines in tech after Micron (MU) posted a quarterly beat, but a wide guidance miss while cutting cap-ex spending, while TSM seen its major clients adjust downward their chip orders for the rest of 2022. In autos, GM warned of a Q2 earnings shortfall, as vehicle wholesale volumes were hurt, but reaffirmed its year outlook. Markets posted a terrible first half of returns, as the S&P 500 fell -20.6%, the Dow fell -15.3% and the Nasdaq fell -29.5%. Markets remain on edge ahead of an expected aggressive rate hike cycle by the Fed (75-bps seen in July and 50-bps in september) after the U.S. central bank has increased its benchmark overnight interest rate by 150 basis points since March already (but bond market action appears to saying something different). The U.S. dollar surging vs. counterpart currencies with both the euro and British Pound down over 1%.

Economic Data

·     S&P Global June final manufacturing PMI at 52.7 (vs flash 52.4) and final May 57.0; final output index for June at 50.2 vs flash reading 49.6 and final May 55.2; output prices index for June at 71.1 vs flash reading 69.4 and final May 73.9

·     U.S. manufacturing activity slowed more than expected in June, with a measure of new orders contracting for the first time in two years. The ISM index of national factory activity dropped to 53.0 last month, the lowest reading since June 2020 and below views of 54.9 and followed a reading of 56.1 in May. New orders sub-index dropped to 49.2 from a reading of 55.1 in May

·     U.S. May construction spending -0.1%, below the consensus +0.4% to $1.780 trln and vs. April +0.8%; May private construction spending unchanged, public spending -0.8%

Sector Movers Today

·     Auto sector; GM warned of a Q2 earnings shortfall, as vehicle wholesale volumes were hurt by the timing of semiconductor shipments and other supply chain disruptions – sees Q2 net income between $1.6B-$1.9B below the $2.46B Street estimate but affirmed its full-year outlook; U.S. light-vehicle sales slid for the fourth consecutive month in June at Hyundai and Kia as global parts shortages and shipping woes continue to hobble output at automakers, leaving showrooms largely empty of new cars and light trucks for a year now; in Electric vehicle space (EV), Chinese autos out with Q2 updates: LI reported a more than 63% jump in Q2 deliveries as delivered 13,024 Li ONEs in June, up 68.9% from a year ago, after delivering 11,496 Li ONEs in May; NIO delivered 12,961 vehicles in June 2022, representing a strong increase of 60.3% Y/Y; deliveries consisted of 8,612 premium smart electric SUVs; Q2 deliveries grew 14.4% Y/Y to 25,059 vehicles; XPEV said 15,295 vehicles delivered in June 2022, a 133% increase Y/Y, 34,422 vehicles delivered in 2Q 2022, a 98% increase Y/Y

·     Bank movers; ahead of earnings start in about 2-weeks, RBC Capital lowers tgts and ests for NTRS, BK, GS, USB and WFC noting volatility in the equity and bond markets is expected to weigh on custody and wealth management businesses throughout the year, impact by particularly weak investment banking for the quarter; BGCP said it now expects Q2 revenue to be slightly below the midpoint of the range of its previously stated outlook; Citigroup (C) is in talks with several local buyers over a potential sale of its operations in Russia, making it the latest major foreign bank to exit the country following Vladimir Putin’s invasion of Ukraine – Financial Times; Piper cuts price targets at the big banks, taking JPM to $158 per share from $170, Citigroup (C) to $62 from $70, MS to $90 from $100, BAC to $47 from $51; JPMorgan downgrades a few regional banks, LOB, HBAN to neutral and HBT to underweight.

·     Semiconductors; MU reported good MayQ Revs/GM/EPS of $8.6B/47.4%/$2.59 but shares fell after guided AugQ well below Street to $7.2B/$1.63/42.5% (vs. consensus $9.1B/$2.57/47.9%), GMs down 490bps q/q with lower volumes and pricing; TSM has seen its major clients adjust downward their chip orders for the rest of 2022, which may prompt the pure-play foundry to cut its revenue outlook for 2022, according to industry sources – Digitimes https://bit.ly/3yuKkfD ; semi equipment stocks AMAT, ASML, KLAC, LRCX, and TER weak initially after MU said it intends to moderate its bit supply growth and to lower its semiconductor equipment capex plan for F2023 to below its prior plan and below F2022 levels.

Stock GAINERS

·     AWK +2%; among leaders in utilities as defensive sectors outperform (NEE higher)

·     GM +2%; warned of a Q2 earnings shortfall, as vehicle wholesale volumes were hurt by the timing of semiconductor shipments and other supply chain disruptions – sees Q2 net income between $1.6B-$1.9B below the $2.46B Street estimate but affirmed its full-year outlook

·     SBAC +2%; strength in defensive sectors, such as REITs, telecom, and Towers (CBRE, CCI, DLR)

Stock LAGGARDS

·     FDX -3%; downgraded to Hold from Buy and tgt cut to $275 from $330 at Berenberg on view that investors are unlikely to give management the benefit of the doubt due to the company’s mixed track record on execution

·     KSS -21%; after announced that its board decided to end its strategic review process and not proceed with its $8B sale to FRG and warned it is seeing a softening in consumer spending and now expects sales to be down high-single digits for Q2

·     LRCX -6%; after MU said it intends to moderate its bit supply growth and to lower its semiconductor equipment capex plan for F2023 to below its prior plan and below F2022 levels

·     MU -5%; reported good MayQ Revs/GM/EPS of $8.6B/47.4%/$2.59 but shares fell after guided AugQ well below Street to $7.2B/$1.63/42.5% (vs. consensus $9.1B/$2.57/47.9%), GMs down 490bps q/q with lower volumes and pricing

·     TSM -4%; has seen its major clients adjust downward their chip orders for the rest of 2022, which may prompt the pure-play foundry to cut its revenue outlook for 2022, according to industry sources – Digitimes https://bit.ly/3yuKkfD