Closing Recap

Wednesday, August 17, 2022

Equity Market Recap

·     U.S. stocks were choppy but finished well off morning lows after minutes from the July Federal Reserve monetary policy meeting came in-line with what speakers have been saying recently. The minutes showed officials say the pace of future interest rates hikes would depend on incoming data, while saying it may take longer than anticipated for inflation to dissipate. Not dovish comments, but not surprising as well, with markets finishing right where they started prior to the release of the Fed minutes. Strength in shares of tech bellwether, Dow component, S&P 500, and Nasdaq 100 component Apple (AAPL) outperformance over the last few weeks truly helping the broader markets, moving to within 5% of its all-time highs today. Mixed results in the retail space today (TGT an EPS miss), sapped some of the recent strength in the discretionary space. Energy names were buoyed by a bounce in oil prices. Consumer Staples and Insurance names were higher, but stocks overall mostly lower as NYSE breadth favored decliners over advancers by over 3-1 margin. Move today all about the Fed, which has lifted its benchmark overnight interest rate by 225 points this year, and the central bank is widely expected to hike rates next month by either 50 or 75 basis points. Stocks also failed at key technical levels, as the S&P 500, after briefly topping its 200-day MA resistance Tuesday (4,325 area), failed to meaningfully get above the 4,300 level today. 

FOMC Minutes details from July meeting:

·     Fed minutes from the July FOMC meeting showed that all participants at July 26-27 meeting agreed 75-basis-point interest rate hike was appropriate; some participants said policy rate would have to reach a ‘sufficiently restrictive’ level to control inflation and remain there ‘for some time; said future rate hikes would depend on incoming information, judged that ‘at some point’ it would be appropriate to slow pace of increases; Fed agreed there was ‘little evidence’ inflation pressures were subsiding and that it would take considerable time for situation to be resolved; they also emphasized that slowdown in demand would ‘play an important role’ in reducing inflation; said strength of labor market suggests economic activity stronger than implied by weak q2, raising possibility of upward GDP revision.

Economic Data

·     July Retail Sales unchanged, slightly below the expected +0.1% rise by economists (June downwardly revised to +0.8% from 1%; Retail Sales ex-autos +0.4% vs. est. (-0.1%; July gasoline sales (-1.8%) vs June +2.5%, cars/parts sales (-1.6%) vs June +0.5% and Retail Sales Ex-autos/gasoline +0.7% vs June +0.7%

·     June inventory/sales ratio 1.30 months’ worth vs May 1.30 months; June Business Inventories +1.4%, in-line with consensus and down from May +1.6%; June business sales +1.3% vs May +1.0%; June retail inventories ex-autos revised to +1.5%

Commodities, Currencies & Treasuries

·     Oil prices recovered off 7-month lows following bullish weekly inventory data, with WTI crude rising $1.58 or 1.83% to settle at $88.11 per barrel, as the EIA said weekly crude inventories fell -7.1M barrels vs. -0.275M consensus and vs. the build of +5.458M last week; Gasoline stockpiles fell -4.6M barrels vs. -1.096M consensus

·     Gold prices slipped ahead of the FOMC July meeting minutes, falling -$13.00 or 0.7% to settle at $1,776.70 an ounce, its 3^rd straight decline (prices recovered following the FOMC minutes release). The US dollar was higher most of the day before fading back to flat for the dollar index (DXY) to 106.50 after the Fed Minutes.

·     The yield on the 10-year U.S. Treasury note topped 2.90% (hit 2.92%), a level that had acted as a ceiling in recent weeks before dipping to 2.88% (but above 2.82% Tuesday) after a lackluster FOMC minutes statement (in-line with current Fed speaker statements). Yields on shorter-term Treasurys have led gains, reflecting bets on the near-term path for interest rates set by the Fed. Weak 20-year bond auction at 1:00 as the US Treasury sold $15B in 20-year notes at a yield of 3.38% vs. 3.355% when issued prior (biggest tail on record) with the bid-to-cover ratio 2.30 (lowest since Oct ’21), primary dealers take 14.71% of U.S. 20-year bond sale, direct 18.32% and indirects 66.97%

Sector News Breakdown

Consumer

·     Retailers: TGT Q2 profit badly lagged consensus and the company ratcheted up the pressure on its second half by sticking with its forecast of a dramatic rebound – Q2 adj EPS $0.39 misses the $0.72 estimate; Q2 sales rose 3.5% to $26.04B, in-line with consensus estimates; Q2 comparable sales grew 2.6% vs. est. 2.8% driven by an increase in traffic, while avg. transaction was flat; PLCE shares slide after weaker Q2 results (EPS and sales miss) on weaker margins and guided FY net sales about $1.73B, missing the $1.77B estimate; TJX lowered its guidance for annual earnings and comparable sales after posting a Q2 sales shortfall that it attributed to historic inflation; LVLU posted 2Q revenue and adjusted EBITDA results in line with its July 28 preannouncement and maintained FY guidance revised on that date; WEBR downgraded to Sell from Neutral, price target $2.75 at Citigroup saying there are too many concerns to remain on the sidelines

·     Housing & Building Products; a day after better results from HD, home improvement retailer LOW with mixed results as EPS beat but revs missed – Q2 EPS $4.67 tops consensus $4.59 but Q2 revenue of $27.48B misses consensus $28.12B; Q2 comparable sales decreased (-0.3%) vs. est. +2.3% and US comp sales rose +0.2% vs. est. +2.3% and backs FY EPS/revs; tool maker SWK downgraded to Hold from Buy at Deutsche Bank and cut tgt to $111 from $126 following better Q2 results but slashed their full year outlooks; weekly housing data showed the MBA mortgage market index falls 2.3% to 273.3 (lowest since 2000), purchase index falls 0.8% and the refinancing index falls 5.4% to 627.1, lowest since Nov 2000

·     Consumer Staples & Restaurants; SJM upgraded to Buy at Bank America and up tgt to 4155 ahead of earnings next week as think there could be upside to sales/EPS ests; DNUT slips as posted Q2 earnings that missed Wall Street expectations, as economic pressures cut into the company’s top and bottom lines and cuts its FY revs view to $1.49B-$1.52B vs prior forecast of $1.53B-$1.56B on lower earnings as well; PFGC Q4 EPS and sales slightly top consensus and forecasts Q1 sales above consensus ($14.2B-$14.5B vs. est. $13.96B); YUM downgraded to Hold from Buy at Argus saying given company’s near-term earnings outlook and relatively high valuation, they prefer the shares of CMG and QSR

·     Casinos, Gaming, Lodging & Leisure sector; RCL is seeking approval to sail from Hong Kong again, after tough coronavirus measures kept ships grounded for most of 2022, according to reports; CCL yesterday in cruise industry said booking activity on Monday was nearly double the level observed on the same day in 2019 after they eased their Covid-19 test requirements; DKNG was upgraded to Buy at Roth Capital and raise price target to $25 from $18, as sees a tactical opportunity to own U.S. iGaming stocks ahead of NFL season

Energy, Industrials and Materials

·     Energy stock movers: oil prices recovered off 7-month lows following bullish weekly inventory data as the EIA said weekly crude inventories fell -7.1M barrels vs. -0.275M consensus and vs. the build of +5.458M last week; Gasoline stockpiles fell -4.6M barrels vs. -1.096M consensus; following the bounce in oil, energy stocks outperformed on the day; DEN shares bounced mid-afternoon after Bloomberg reported the company is said to explore options including sale

·     Transports, Industrial & Machinery; overall names were weaker to start given the broader market weakness; in farm equipment (DE ), Jefferies noted proprietary tracker of used farm equipment shows supply held steady in August while prices rose sequentially. Large ag prices were up ~12.8% YoY (+1.3% MoM); ODFL downgraded to Neutral at Vertical Research in truckers

·     Metals & Materials; Aluminium prices advanced after news that a European smelter will close due to high power prices, boosting worries about potential shortages, but copper and other industrial metals, fell on persistent worries about a global economic downturn (overall AA lower); SAND upgraded to Outperform from Market Perform at BMO Capital with a price target of $9.00, down from $9.50 saying the co has significantly increased its scale, enhanced its diversification, and added several long-life assets to the portfolio; VALE downgraded to market perform from outperform at Itau BBA Securities

Healthcare

·     Biotech & Pharma movers: SNY slides after stopping clinical development of its once-promising breast-cancer treatment amcenestrant after an independent monitoring committee said that the drug didn’t meet requirements to continue its study; GSK said that the plaintiff’s counsel in the first of the U.S. lawsuits over discontinued heartburn drug Zantac plans to file a notice of voluntary dismissal. The pharmaceutical giant said that it didn’t settle Joseph Bayer’s claim and hasn’t made any payment for the dismissal; BPMC said its treatment for a rare immune system disorder significantly improved symptoms in a pivotal trial, but shares fell; SAVA shares following form 4 filing overnight showing big stock purchases from a Director; BLUE said the FDA approves first cell-based gene therapy to treat adult and pediatric patients with beta-thalassemia who require regular blood transfusions

·     MedTech Equipment; Agilent (A) posted revenue of $1.72B (+13.2% core) with EPS of $1.34 above consensus of $1.20; raised FY22 core growth from +8-9% to +10.3-11.8% and EPS to $5.06-5.08 from $4.86-4.93 and China grew +29% with ~half of the $50-55M deferred revenue from the 2Q lockdown realized in 3Q

·     Healthcare Services: Cowen said 324 non-profit hospitals represented in their survey report indicate -2.4% y/y revenue growth in July, while 25% of respondents describe sequential labor costs trends as "improving" (better than May & June surveys; TDOC downgraded to Neutral from Buy at Guggenheim with $25 tgt saying its revenue growth and EBITDA will remain pressured by its exposure to the consumer segment; OPCH 11M share Spot Secondary priced at $33.254 CVS, WMT and WBA must pay combined $650.6M to two Ohio counties to address opioid crisis

Technology, Media & Telecom

·     Semiconductors; ADI ported earnings and revenue for its fiscal third quarter above Wall Street consensus saying that economic uncertainty was beginning to impact bookings; for NVDA Bank America noted another guide-down unwelcome but drive necessary reset as reports earnings on 24-Aug, with consensus now aligned with recent negative preannouncement, but current FQ3 (Oct) Street consensus could have downside risk as it might not reflect the full-quarter of inventory correction in gaming/crypto products that started in late FQ2.

·     Hardware, Software movers: TCEHY logged its first-ever revenue decline after its workforce shrank almost 5%, as revs fell a deeper-than-projected 3% to 134 billion yuan ($19.8 billion) while net income also missed estimates, plunging 56% to 18.6 billion yuan in the June; TTWO downgraded to Hold from Buy at Deutsche Bank in video game sector following its F1Q23 earnings report and guidance update, based on what we see as a balanced risk/reward outlook; AAPL upgrade to Outperform from Neutral at Credit Suisse, and received a price target boost to $220 from $200 at Wedbush; AMZN is testing a feature in its app that would show users a TikTok-style photo and video feed of products for shoppers to share with other users – WSJ; AAPL announced September 7^th as day for unveiling new iPhone 14