Closing Recap

Wednesday, August 21, 2024

After snapping a nice win streak yesterday, US equities gained a bit over night despite much discussion and swirling expectations around today’s BLS preliminary annual payrolls revision. The number tossed around last weekend and so far this week was a negative revision of about one million jobs, a number sure to restart the recession discussion and debate about rate cut magnitude come September. Pre-data (and pre-Fed minutes) probabilities showed a 67.5% expectation for a September cut of 25bps and 32.5% for a 50bps cut with a September 2025 implied rate of 3.279%. After we all grew old waiting for the payroll revisions number (33 minutes behind schedule), futures had risen, dipped and risen again to test resistance pivots without breaking through. The -818k downward revision was within the scope of investor expectations, thus mostly met with a yawn by the market before a bit of relief pop. Rate cut probabilities shifted only slightly to 69.5% for a 25bps cut and 30.5% for 50bps in September with the September 2025 implied rate moving to 3.259%. Breadth expanded to about 5:2 favoring advancers and all S&P sector ETFs enjoyed gains except for Real Estate and Financials. Consumer Discretionary led the gainers at +1.43%.

In data of note today, a piece of good news for consumers, the national average price for a gallon of gas dipped below $3.40 for the first time since mid-March. Not so great for consumers, employment hasn’t been quite as strong as we thought. Per @bespokeinvest, the -0.5% revision announced this morning was the largest since 2009. Outside the equity sphere, @charliebilello notes the US Dollar index hit its lowest level of the year while gold hit an all-time high up 22% year-to-date. Finally, @KobeissiLetter attempts to ensure we don’t get complacent, noting the large negative employment revision, unemployment at 4.3% (highest since 2001), five of the past six jobs reports have been revised lower, the US Dollar has lost 25% of its purchasing power in four years and 11% of credit card balances are now delinquent in the US (highest in over 10 yrs). Maybe a little fear is a good thing.

Heading into the final hour of trading, after more dovish Fed minutes and another move higher in equities, indices were off highs and fading a bit but still holding gains reflecting a shift in rate cut probability expectations. The outlook for a 25bps cut briefly dipped to 59.5% with a corresponding rise in the probability of a 50bps cut to 40.5%. Similarly, the September 2025 implied rate continued to slip, hitting 3.173%. Breadth expanded to almost 3:1 favoring advancers, while small caps widened their outperformance on the day with IWM +1.00% versus QQQ +0.35% and SPY +0.28%. Financials (XLF, -0.27%) was the only sector loser, while Consumer Discretionary (XLY, +1.25%) and Materials (XLB, +1.06%) led the gainers. Growth and value both gained with the Russell 1000 Value only slightly outperforming its Growth counterpart at +0.52% to +0.44%. Markets now likely will look ahead to comments out of Jackson Hole for direction later in the week.

Federal Reserve officials overwhelmingly said they wanted to cut interest rates at their next meeting in September, with some even suggesting a cut in July. Minutes released Wednesday showed that “several” of the 19 Fed officials saw “a plausible case” for cutting rates by 0.25 percentage point at the July 30-31 meeting or indicated “that they could have supported such a decision.” Their position was based on declines in inflation and a rise in the unemployment rate that were already showing up in economic data. “The vast majority” of officials agreed that “it would likely be appropriate to ease policy at their next meeting,” in September, if inflation data continued to come in about as expected. Since that July meeting, there has been even more evidence of cooling inflation and a weakening labor market. The Fed’s next meeting is set for Sept. 17-18.

• September WTI crude futures faded on the payroll revisions data as a new source of demand concern, then continued to slide with today’s EIA inventory report and never found firm footing for a reversal. Futures settled lower by $1.24/bbl, or -1.69%, to $71.93 as the weekly EIA report showed a larger-than-expected draw, again feeding into demand fears. With excess-supply worries already in the market heading into 2H24, today was a clear reflection of the sensitivity on the demand side. US recession prospects and geopolitics remain unsettled, so expect inconsistency over the next few months. Brent similarly slipped $1.15/bbl, or -1.49%, to $76.05.
• The U.S. dollar index (DXY) declined for a 4^th day, sinking to its lowest levels since the end of December approaching 101 to the downside, while gold pulls back from all-time highs. The pound steadied near the one-year high it touched against the dollar the previous day, with the U.S. currency under pressure from rising expectations of Federal Reserve interest rate cuts. The euro was higher above 1.153 vs. the dollar and the yen strengthened to 145. The 10-year Treasury yield was down at 3.778%, lowest yield since July 2023. Bitcoin popper over 3% above $61,000.

• In Off-Price Retail: TJX raises FY guidance for both pretax profit margin and EPS; raises FY EPS view to $4.09-$4.13, above prior forecast $4.03-$4.09 and sees FY comp sales +3%, the high end of prior forecast +2% to +3% (est. +2.76%); also reported quarterly EPS and sales above consensus 9boosts shares of ROST, BURL)
• In Department Stores: Macy’s (M) cuts annual sales forecast for FY24 to $22.1B-$22.4B, vs. prior forecast $22.3B-$22.9B while reaffirms its annual adjusted EPS outlook; Q2 net sales fell -3.8% y/y to $4.94B, missing the $5.12B est., but EPS of $0.53 topped the $0.29 est.; said updated FY sales & comp sales outlook to reflect more discriminating consumer & heightened promo environment. JD shares declined after WMT revealed it sold its stake in JD, ending an 8-year investment in the Chinese e-commerce company; sold 144.5 million American depositary receipts in JD.com at $24.95 apiece.
• In Beauty/Cosmetics: COTY reported Q4 results with sales and adjusted EBITDA in-line with consensus. First-time F2025 guidance is also broadly consistent with expectations. Like-for-like sales growth of 5% is consistent with consensus and comprised of 6% Prestige growth and 4% Consumer growth.
• In Beverages: Bernstein noted weekly beer tracker (BUD, SAM, STZ, HEINY) shows for the two weeks ending Aug 10th, market volumes declined -3.8% YoY. This is a sequential improvement from the -4.8% volumes in the previous two weeks. On a trailing 4wk basis the market saw volume declines of -4.3% (dragged further down by the prior 2wk period), a significant worsening vs last month’s -1.9%.
• In Tobacco: JT Group agreed to buy cigarette maker Vector Group Ltd. (VGR) for about $2.4 billion to expand the Japanese tobacco company’s position in the US. JT Group will acquire all Vector for $15 a share https://tinyurl.com/49b3rdka

• In Furniture: LZB reported Q1 adj EPS $0.62 vs. est. $0.60; Q1 sales rose 2.9% y/y to $495.5M vs. est. $481.5M; but guided Q2 revenue $495M-$515M, below consensus of $518.4M.

• In RV Sector: DOOO downgraded to Hold from Buy at Stifel after attending Club BRP 2025, an annual gathering where the company hosts its dealers for business discussions and unveils its new line-up for 2025. The event was well attended but sentiment was cautious and Stifel believes that the industry recovery May take longer than expected.

• In the Coal Sector: CEIX and ARCH agreed to combine in an all-stock merger deal and to rename the combined company Core Natural Resources. The companies are projecting $110M-$140M of annual cost savings from efficiencies gained by the deal. Arch stockholders will get 1.326 shares of Consol common stock for each share of Arch common stock. Consol Energy shareholders will own 55% of the combined company while Arch Resources shareholders will account for 45%.
• In E&P Sector: SM upgraded from Hold to Buy at Tudor Pickering with $56 tgt from $50; CRC upgraded to Buy from Neutral at Bank America and raise tgt to $65 saying the pushback on natural gas with carbon capture has been that it "simply isn’t green enough," but the attitude may be changing as the market comes to grips with power demand implications from data center buildouts.

• In Crypto: BITF agreed to acquire Stronghold Digital Mining, Inc. (SDIG), under which Bitfarms will acquire Stronghold in a stock-for-stock merger transaction. The Transaction is valued at approximately $125M equity value plus the assumption of debt valued at approximately $50M. https://tinyurl.com/2n6r9x62 ; MSTR was initiated with an Overweight rating and $194 price target at Cantor. Overall crypto space strong with Bitcoin rising over 3% and lifting stock prices in space.
• Investment Management: BEN shares slumped after announced that it was closing a $2B Macro Opportunities strategy and that Ken Leech, co-chief investment officer of wholly-owned subsidiary Western Asset Management Company, has been placed on leave of absence after he received an SEC Wells notice; PX was downgraded to Neutral from Buy at UBS on slower AUM growth; reinvesting needs saying given the muted FRE outlook and likely modest upside from any potential acquisition, view shares as fully valued.
• In REITs: EPR and NTST both upgraded to Strong Buy from Outperform largely based on valuation at Raymond James noting YTD, EPR and NTST have lagged the net-lease sector by 1300bp and 1700bp, respectively. The firm believes the bulk of the underperformance is being driven by headline risk, not financial risk.

• ALC posted a mixed 2Q with the top line light by -$45mn offset by a $0.01 adj EPS beat, as strength in IOLs offset FX pressures and slippage in Vision Care linked to one-time supply chain impacts.
• BMY said the FDA has accepted its application seeking approval of the combination of its Opdivo and Yervoy cancer drugs for the early treatment of certain patients with the most common form of liver cancer.
• BPTH said it saw extended treatment durability from a combination therapy using its experimental drug prexigebersen in an ongoing mid-stage trial testing the combination against a type of blood cancer.
• REGN said last night the FDA turned down its application for a treatment for a form of blood cancer; said it received from the FDA a so-called complete response letter for its application for linvoseltamab in relapsed or sicker multiple myeloma patients who have had at least three prior therapies.
• RVPH 4.76M share Secondary priced at $1.05.

• In Aerospace & Defense: Truist upgraded WWD to Buy from Hold and raise tgt to $187 from $152 saying with China natural gas engine sales now effectively removed from expectations, and taking into consideration the recent stock pullback, says now is the time to get off the sidelines. Truist downgraded TGI to Hold from Buy and cut tgt to $15 from $17 citing the company’s continued weak cash generation, ongoing challenges in its interior segment, a general lack of near-term catalysts, and potential risk to management’s fiscal 2025 outlook.
• In Lithium sector: SQM reported a bigger-than-expected 63.2% slide in its quarterly profit; Q2 EPS $0.75 missed the $0.95 estimate while revs of $1.3B was mostly in-line with ests; said while it posted record-high quarterly sales volumes of lithium, its results were dragged down by a significant drop in the metal’s prices

• In IT Services & Consulting: BBAI said it was part of a team with Concept Solutions that was awarded a 10-year shared contract worth as much as $2.4 billion to provide information- and emerging-technology services to the U.S. Federal Aviation Administration.
• In Telecom: CCOI downgraded from Neutral to Underperform at Bank America and cut tgt to $65 from $75 saying the company remains deeply immersed in the Sprint network integration and monetizing the wavelength opportunity has fallen well behind schedule.

• MCHP said on August 17 it detected potentially suspicious activity involving its information technology systems. Upon detecting the issue, the company began taking steps to assess, contain and remediate the potentially unauthorized activity.
• TXN upgraded to Buy from Neutral at Citigroup and raise tgt to $235 from $200 after the chip maker hosted a capital management call yesterday and lowered its 2026 capex from $5.0B to $2.0B-$5.0B and intimated gross margins are bottoming.