Mid-Morning Look

Thursday, October 13, 2022

After a promising start to the day, with overnight S&P futures pointing to 1% gains following positive developments in the UK this morning easing liquidity event fears and contagion in the region, markets were primed for a good day if the September Consumer price index (CPI) showed any moderation in inflation expectations …it did not. The Labor Department’s consumer prices index (CPI) report showed headline CPI gained at an annual pace of 8.2% in September, compared to an estimated 8.1%, while the core reading (ex food & energy) rose 6.6% y/y, above ests of 6.5% and a new all-time high dating back to 1982. The data reinforced the case for another big rate hike by the Federal Reserve as fed-funds futures traders priced in a 100% probability the Federal Reserve will lift its key interest rate by 75 bps to a range of 3.75%-4% in its early November meeting. U.S. short-term interest-rate traders’ now price in rising chance fed policy rate to reach 4.75%-5% range in March 2023. The 10-year yields spiked to highs of 4.08% (off lows of 3.84% prior to data), before paring gains while the dollar eased after hitting fresh 27-year highs vs. the Japanese yen and 2-week highs vs. the Euro. Gold and Bitcoin tumbled on CPI as well. The inflation data overshadowed positive developments in the UK where reports indicated Prime Minister Truss is considering raising Corporation Tax next year in a spectacular mini-Budget U-turn, UK paper the Sun reported this morning. Reports said Truss is not planning any further changes to her economic plan and she has full confidence in the OBR independent forecaster to do its work accurately. Stocks bounce off morning lows, but already paring some of that bounce as trend remains down despite the S&P and Nasdaq coming into the day with 6-day losing streaks.

Economic Data

·     Inflation reading “hot” – Consumer price index (CPI) for Sept on a headline basis reported at +0.4% m/m vs. est. +0.2% (and vs. +0.1% prior) and rose +8.2% y/y vs. est. +8.1% y/y (vs. prior +8.3%). CPI on a core basis (ex food & energy) rose ++0.6% vs. est. +0.5% m/m (vs. prior +0.6%) and rose +6.6% vs. +6.5% y/y (vs. prior +6.3%) – core reading the hottest since 1982. Lower YoY % increase: Fuel Oil, Gasoline, Electricity, Food at Home, New Cars, Used Cars while higher YoY % increase: Gas Utilities, Transportation, Food away from Home, Shelter, Medical Care, Apparel.

·     Weekly Jobless Claims rose to 228K in latest week vs. est. 225K and 219K prior week; the 4-week moving average rose to 211,500 from 206,500 prior week; continued claims rose to 1.368M from 1.365M prior week and US insured unemployment rate unchanged at 1.0%.

Sector Movers Today

·     Pharma movers: RLMD shares tumble after saying its therapy to treat major depressive disorder, REL-1017, did not show statistically significant improvement in symptoms of depression when compared to a placebo; AXSM advanced on the RLMD depression drug fails; PFE and BNTX announce positive early data from clinical trial of omicron BA.4/BA.5-adapted bivalent booster in individuals 18 years and older; VECT priced its 16.7M share offering at $7.50 per share; DICE 8.22M share Secondary priced at $36.50; XNCR upgrade from Outperform to Strong Buy at Raymond James; GSK said its experimental vaccine against respiratory syncytial virus (RSV) sharply reduced the risk of disease in a key trial, paving the way for a contest with PFE

·     Biotech movers: BMRN said U.S. health regulator accepted its marketing application for Valoctocogene Roxaparvovec AAV gene therapy; adds agency has set target action date as March 31, 2023; few notable research calls as BIIB upgraded from Hold to Buy at Stifel and raise price tgt to $299 as think upcoming Roche gantenerumab data is unlikely to live up to the high bar lecanemab recently set, and we think there’s a meaningful commercial role for lecanemab even if LLY’s donanemab succeeds; BGNE upgraded to Buy from Neutral at Guggenheim based on their higher conviction in the global Brukinsa opportunity in hematology; RARE upgraded to Buy from Neutral at Guggenheim as well saying the near-term pipeline risk appears adequately discounted

·     Materials, Paper, and Packaging: AMCR, SON, SLVM upgrade to Buy and downgrade AVY, BCC, GEF at Bank America saying increased recession risks bring additional earnings risks and adjust ratings. Still see SLGN and GPK as Buy-rated stocks with the best value/catalyst combination, though we recently moved GPK off the US1 list. Said packaging has already incorporated much bad Europe, energy, and foreign exchange (FX) news. Paper/Forest Products (PFP) is also inexpensive but we’re cautious ahead of looming price declines

·     Semiconductors: AMAT lowered its F4Q revenue guidance mid-point from $6.65B to $6.40B, which includes an impact of $400M driven by new export regulations for U.S. semiconductor technology sold in China – cuts Q4 adj EPS view to $1.54-$1.78 from $1.82-$2.18 (est. $2.01); TSM cut its cap-ex spending to around $36B for 2022, down from prior view of $40B-$44B; Revenue for the quarter climbed 36% to $20.23B, versus TSMC’s prior estimated range of $19.8B-$20.6B; forecast a 29% rise in Q4 revenue to between $19.9B-$20.7B, compared with $15.74B a year earlier; equipment stocks (AMAT, LRCX, KLAC, ASML) been hardest hit of late on reduced cap-ex spending fears from semis (TSM overnight, MU last week)

Stock GAINERS

·     ACI +8%; after Bloomberg reported Kroger (KR) in discussions to combine with Albertsons https://bloom.bg/3Vt901t

·     BIIB +2%; upgraded from Hold to Buy at Stifel and raise price tgt to $299 as think upcoming Roche gantenerumab data is unlikely to live up to the high bar lecanemab recently set

·     CMCSA +2%; Citigroup upgraded ATUS and CMCSA to Buy saying cable revenue is going ex-growth, and average EBITDA-based valuations have approached Telco levels for the first time since the period surrounding the financial crisis

·     DAL +2%; Q3 adj EPS $1.51 vs. est. $1.54 and revs $12.84B vs. est. $12.83B while guides Q4 adj EPS $1.00-$1.25 vs. est. $0.80 and sees Q4 revs to be up 5% to 9% from 2019 levels, with operating margins of 9% to 11%.

·     DCT +6%; 4Q FY22 came in above Street estimates on the top and bottom line as ARR grew a healthy 25% Y/Y (21% organically) and SaaS net dollar retention came in at 108%

·     DPZ +8%; beat quarterly same-store sales estimates as U.S. comp-store sales rose +2% vs. 1% estimate as revs rise to $1.07B vs. est. $1.06B, though EPS of $2.79 misses the $2.96 estimate – Domestic franchise comparable sales growth +2.2% vs. estimate +1.3%

·     DWAC +15%; shares rose after saying the Truth Social Android App is available for users to download on Alphabet Inc’s (GOOGL) Google Play Store

·     JPM +2%; along with early gains in Citi and WFC ahead of earnings for each tomorrow

·     QDEL +9%; guides prelim Q3 revs $782M-$785M vs. est. $651.8M; COVID-19 product revenue is expected to be approximately $171M and non-COVID-19 product revenue is expected to be in the range of $611M-$614M

·     WBA +3%; posted a loss for the fourth quarter, partly due to higher operational costs and an impairment charge related to its Boots UK business, but adj EPS of $0.80 topped ests on in-line revs while guides FY EPS $4.45-$4.65 vs. est. $5.01

Stock LAGGARDS

·     ACCO -12%; guides FY sales $1.940B-$1.98B below est. $2.03B and year EPS $1.05-$1.10 vs. est. $1.26 and below prior $1.39-$1.44

·     AMAT -5%; lowered F4Q rev guidance mid-point from $6.65B to $6.40B, which includes an impact of $400M driven by new export regulations for U.S. semiconductor technology sold in China

·     AOS -5%; lowers FY adj EPS $3.05 to $3.15, down from prior $3.35 to $3.55 and guides prelim Q3 EPS to $0.71, below the $0.88 estimate

·     RLMD -80%; after saying its therapy to treat major depressive disorder, REL-1017, did not show statistically significant improvement in symptoms of depression when compared to a placebo.

·     XLU -1%; Bespoke Investment noted last night the Utilities sector (XLU) is now down 20.5% over the last month. March 2020, October 2008, late 2002, and the 1930s are the only other periods that saw one-month crashes of 20%+ (rising rates/yields hitting dividend paying sectors)