Closing Recap

Wednesday, February 01, 2023

Index	Up/Down	%	Last
DJ Industrials	8.56	0.03%	34,094
S&P 500	42.89	1.05%	4,119
Nasdaq	231.77	2.00%	11,816
Russell 2000	28.88	1.49%	1,960

 

Equity Market Recap

·     Markets were waiting for fireworks at the Federal Reserve policy meeting and press conference and boy did they get it! Stock markets were modestly weaker heading into the pivotal FOMC and Fed Chair Powell press conference following a massive ramp up for stocks in January. Markets got what they expected as the Fed raised its benchmark interest rate 25-bps, easing up on its inflation fight as prices begin to moderate. Market reaction was whippy initially but surged to the upside after Fed Chair Jerome Powell said that the process of disinflation is underway and happening without weakening in the labor market (though noted the jobs market remains very tight). Powell acknowledged that price pressures in the goods sector and in housing appear to be easing or will soon be easing. But inflation excluding food, energy and housing remains strong, he warned. The commentary was not exactly “dovish,” but his comments were not nearly as “hawkish” as some had feared, and Bulls ran with it as stocks jumped. U.S. Rate futures price in about 85% chance of 25 bps hike in March, a pause seen at 15.5% probability – FedWatch. Fed fund futures still price in rate cuts this year, with the fed funds rate seen at 4.486% by end of December. Powell also said, “the current outlook holds for slower growth, modest gains in unemployment and a slow decline in inflation”. “If the economy performs broadly in line with those expectations, it will not be appropriate to cut rates this year.” The Fed dominated the action in markets late day, but still huge catalysts still this week with both the ECB and BOE rate decisions tomorrow as well as a big earnings barrage including some of biggest companies in the world Thursday night (AAPL, AMZN, GOOGL) and then the monthly jobs report on Friday.

 

FOMC Meeting Bullet points:

·     In its statement, the Federal Reserve raised its target interest rate by 25-bps (as expected) to 4.5%-4.75% range yet continued to promise "ongoing increases" in borrowing costs as part of its still unresolved battle against inflation. "Inflation has eased somewhat but remains elevated," the U.S. central bank said as they continue to aim for their 2% inflation target. The Fed said the U.S. economy was enjoying "modest growth" and "robust" job gains, while still "highly attentive to inflation risks." The Fed pushed back against investor expectations that it was ready to flag the end of the current tightening cycle.

 

Economic Data

·     Private Payroll data showed January ADP Jobs Report rose +106K vs. +158K consensus and +235K in December; annual pay rose 7.3% Y/Y, unchanged from December.

·     ISM manufacturing for January contracted further, falling to 47.4 from 48.4 in December, the third straight monthly contraction to the lowest level since May 2020; new orders sub-index plunged a 5^th month to 42.5 in January from 45.1 in December while supplier deliveries edged up to 45.6 from 45.1 in December; employment index 50.6 in January vs 50.8 in December.

·     Construction Spending for December falls -0.4% (vs. est. unchanged) and Dec private construction spending -0.4%, public spending -0.4%.

·     S&P Global January final manufacturing PMI at 46.9 (vs flash 46.8).

·     U.S. JOLTS job openings for December 11.012M vs. prior reading 10.44M for November.

 

Commodities, Currencies & Treasuries

·     WTI crude oil falls -$2.46 or 3.12% to settle at $76.41 per barrel, as WTI crude comes off 7^th negative month in last eight while natural gas prices extend slump, lowest levels since April 2021. Weekly inventory data from both the API and EIA were overly bearish, showing larger than expected builds in stock piles. Meanwhile, OPEC and its allies stuck to their output policy at a virtual meeting on Wednesday. OPEC’s oil output fell in January, as Iraqi exports dropped and Nigerian output did not recover, with the 10 OPEC members pumping 920,000 barrels per day (bpd) below OPEC+ targeted volumes. Natural Gas ends below $2.500 for 1st time in 22 months, closing 8% lower at $2.468 mln Btus. Gold prices slipped -$2.50 to settle at $1,942.80 an ounce, settling prior to the FOMC policy meeting where they raised rates by 25-bps.

·     Treasury yields tumbled alongside the US dollar as stocks surged following Fed Chairman Powell’s press conference. The 10-yr dropped to lows below 3.4% after hitting 3.51% after the initially rate hike statement and the dollar index (DXY) drops below 101.25, down -0.85%. Markets very whippy as Powell spoke.

 

 

Macro	Up/Down	Last
WTI Crude	-2.46	76.41
Brent	-2.62	82.84
Gold	-2.50	1,942.80
EUR/USD	0.0115	1.0976
JPY/USD	-1.15	128.94
10-Year Note	-0.122	3.408%

 

 

Sector News Breakdown

Consumer

Autos:

·     China monthly delivery data showed: LI reported vehicle deliveries for January rose 23% y/y to 15,141 units vs. 12,268 y/y, NIO reported deliveries for January of 8,506, and XPEV reported vehicle deliveries for January of 5,218 units.

·     TSLA plans to ramp up Giga Shanghai production after surge in orders, report says, Electrek reports.

·     In auto suppliers, MGA upgraded to outperform at BMO Capital, arguing that we are much closer to the end of the monetary tightening cycle than to the beginning, and discretionary stocks like auto parts will outperform as it becomes clearer that inflationary trends are abating.

 

Consumer Staples & Restaurants:

·     In foods, MDLZ Q4 adj EPS $0.73 vs. est. $0.70; Q4 revs $8.70B vs. est. $8.32B; Q4 adj gross margin 36% and adjusted operating margin 15%; expects organic net revenue growth of 5 to 7 percent, high single-digit adjusted EPS; CASY guides Q3 same-store inside sales in lower half of annual range of 5-7% increase, same-store fuel gallons near low end of annual range of flat to +2%, and total operating expense growth near low end; CAG said it is recalling 2.58m pounds canned meat/poultry due to possible packaging defect.

·     In beverages, RBC Capital said Beer Marketers Insights reported that STZ’s beer business is off to a strong start to the year, with dollar sales up 20% in latest with volume up 13.6%.

·     In restaurants, EAT Q2 EPS $0.76/$1.02B above consensus $0.52/$991.7M; EBITDA $91M vs consensus $79.7M; comps +9.7% vs consensus +6.1% – company-owned +9.7% vs consensus +6.8% (Chili’s +8% vs est. +5.6% and Maggiano’s +21.2% vs est. +17.9%); guides FY EPS $2.60-$2.90 vs consensus $2.56 and revenue $4.05B-$4.15B vs consensus $4.04B – shares reversed from comments during its conference call, which weighed on casual dining names.

·     In tobacco, MO beats bottom-line, authorized a new $1B share repurchase program; Q4 Non-GAAP EPS of $1.18 beats by $0.02 and revs of $5.08B slip -0.2% y/y, missing views.

 

Retailers:

·     In footwear, FL upgraded to Outperform from Neutral at Credit Suisse as think sentiment on the stock remains overly bearish and focused on the negative thesis of NIKE pulling back from FL.

·     In toy retailers, Goldman Sachs assumed MAT with Buy rating on accelerating revenue growth from the return of Disney Princess, margin expansion, and upside from share repurchases, downgrade FNKO to Sell on elevated execution risks and downgrade HAS to Neutral.

·     PTON Q2 EBITDA ($122.4M) vs est. ($108.1M) on revs $792.7M vs est. 709.8M; connected fitness subs 3.033M vs consensus 3.00M; guides Q3 EBITDA ($50M)-($35M) vs consensus ($43.7M), revenue $690M-$715M vs consensus $690.5M.

 

Homebuilders, Building Products, Home Furnishing:

·     Resilient housing sector with 52-week highs yesterday for LEN, PHM, MTH as housing market remains cool, but share prices holding up (little profit taking today).

·     Weekly US mortgage market index falls -9.0% to 232.4 in latest week as per the Mortgage Bankers Assoc., with the purchase index falling -10.3% and refinancing index decreases -7.1% as the US average 30-year mortgage rate falls 1 bp to 6.19%.

 

Energy

·     Oil inventory data bearish as the EIA said weekly crude-oil stockpiles increased by 4.1 million barrels to 452.7 million barrels, and are now 4% above the five-year average, (est. was for draw) while oil stored at Cushing, Okla., the delivery point for U.S. stocks, increased by 2.3 million barrels. Gasoline stockpiles climbed by 2.6 million barrels to 234.6 million barrels, compared with analysts’ expectations of a 900,000-barrel increase.

·     In utilities, AEP & EIX both downgraded to Equal Weight from Overweight at Wells Fargo citing lack of catalysts plus potential strategic hiccup for AEP and EIX on valuation and would swap into DTE and PCG.

·     In MLP sector, Goldman Sachs said ahead of 4Q22 earnings, they see modest upside for the midstream sector overall and prefer Liquids and Permian exposed stocks over gas exposure. Downgrade ETRN to Sell (from Buy) on new risks to the timeline of its Mountain Valley Project.

 

Financials

Consumer Finance, Insurance & Services:

·     Credit card issuers pressured (COF, DFS, SYF) after the Consumer Financial Protection Bureau (CFPB) proposed a rule to curb excessive credit card late fees that cost American families about $12 billion each year. Major credit card issuers continue to profit off late fees that are protected by an expansive immunity provision. Credit card companies have also relied on this provision to hike fees with inflation, even if they face no additional collection costs. The proposed rule would help ensure that over the top late fee amounts are illegal. Based on the CFPB’s estimates, the proposal could reduce late fees by as much as $9 billion per year.

·     In insurance, CB Q4 results missed slightly due to a true-up in Agriculture. Chubb reported operating EPS of $4.05 per share, missing consensus of $4.25. The key variances were higher catastrophe losses ($400M) and higher accident year ex-cat combined ratio (85% vs. 84% est.)

·     BX said it had blocked withdrawals from its $69 billion real estate income trust (BREIT) in January. BREIT said it fulfilled redemption requests of about $1.3 billion in January, representing 25% of the approximately $5.5 billion of the total withdrawal requests it had received during the month.

 

Healthcare

Biotech & Pharma:

·     Big day of earnings tomorrow morning in large cap Pharma, with BMY, LLY and Dow component MRK all expected to report – follows weaker PFE guidance yesterday.

·     AMGN reported 4Q results last night that were in-line with expectations while guidance did not include the HZNP acquisition; Q4 beat on revs/EPS despite multiple legacy franchises light.

·     EVLO said its skin disease treatment did not meet the main goal within three groups of patients in a mid-stage trial and added it would reduce its workforce.

·     NVO reported a double-digit improvement in net profit for 2022, thanks to higher sales during the financial year driven by diabetes and obesity treatments.

·     TSHA downgrade from Buy to Hold at Jefferies citing uncertainties for approval path of lead gene therapy TSHA-120 post-FDA meeting update.

 

Healthcare Services & MedTech movers:

·     In medical devices, BSX Q4 EPS of $0.45 misses the $0.47 est. on in-line revs of $3.24B and guided FY23 adj profit in range $1.86-$1.93 below est. $1.93; EW delivered a Q4 beat on both sales and EPS, as well as reiterated its 2023 outlook while said TAVR growth trends in both the U.S./OUS decelerated sequentially on a stacked 2-year basis; SYK Q4 results exceeded consensus top-line expectations, while beating on EPS by 6% and introduced 2023 organic sales growth outlook of 7.75% at the midpoint; TMO 4Q rev/EPS beat driven by broad based strength, although margins light; initial ’23 guidance comes in ahead of Street on both top/bottom line.

·     In Healthcare IT, MDRX downgrade from Overweight to Neutral at Piper saying the valuation disconnect between MDRX and EHR peers has narrowed, and MDRX now trades within 6% of the 10x multiple we believe constitutes fair value.

·     In managed care: HUM reports a slightly wider loss in 4Q while revenue grew 6.6%, falling shy of analyst expectations – revs rise to $22.44B, but below the market consensus of $22.48B.

 

Industrials & Materials

Transports

·     In rails, CP reported earnings that beat consensus estimates as the company continues to execute though operating margin was worse than expected.

·     In truckers, ODFL leads truckers and transports higher on EPS beat and in-line revs of $1.49B. Keybanc said their proprietary spot rate index for trucks continues to underperform seasonal variations, ending January down high-teens from the start of the year.

·     In airlines, HA reported better than expected 4Q22 results but the 1Q23 guidance is particularly negative.

 

Industrials, Aerospace & Defense

·     ATKR raises FY adj. EBITDA outlook to $950M-$1.1B from $850-$950M; 2023 adj. EPS outlook to $15.85-$17.75, up from $13.10-$14.90 after Q4 beat.

·     JCI 1Q adj EPS $0.67 vs est. $0.67 on sales $6.1B vs est. $6.25B; sees 2Q organic revs about +10% vs est. +6.7%; sees FY organic revs +high-single to +low-double digits vs est. +6.5% and adj EPS $3.30-3.60 vs est. $3.52.

·     HUBB upgraded from Underweight to Neutral at JPMorgan following a 4Q print that missed on sales but was in line on core profits, and a 2023 guide that was in line with consensus but below our forecast and what we believe were overly optimistic expectations in the Fall.

·     OTIS posts operating beat vs consensus driven by better service segment performance with outlook ahead of consensus.

 

Materials, Metals & Mining

·     In paper & Packaging: WRK a drag on paper stocks, with shares tumbling after Q1 adj EPS $0.55 missed the $0.63 estimate and sales fell -0.6% y/y to $4.92B below est. $5.11B, (weighed on IP, PKG shares); OI reported 4Q22 adj. EPS of $0.38, above guidance of $0.28-$0.33 and consensus of $0.32 and EBIT of $140 million was slightly above consensus of $137 million; Volume was down 3% compared to guidance of down low-single digits.

·     In chemicals, SMG posts smaller EPS loss of ($1.02) vs consensus ($1.34) and revs $526.6M vs est. $502.4M; EBITDA ($21.2M) vs est. ($31.2M); FY23 guidance – 20-30% decline in Hawthorne segment net sales, LSD decline in total Company net sales, LSD decline in gross margin rate,

 

Technology

Internet, Media & Telecom

·     In social media, SNAP shares tumble after Q1 revs of $1.3B was flat from same period last year and rev growth decelerating for 7 straight quarters to an estimated ~0% in Q4; META expected to report earnings tonight.

·     Dating service MTCH slides as Q4 adj EPS $0.30 vs. est. $0.54; Q4 revs fell -2% y/y to $786.2M vs. est. $788.5M; payers declined 1% yoy to 16.1 mln as of qtr-end; guides Q1 revenue $790M-$800M below est. $816M and sees adjusted operating income $250M-$255M vs. est. $212.6M

·     In internet, BIDU rises as BlackRock reports 6.6% passive stake as of Dec 31, 2022 – SEC filing; US listed Chinese stocks rise in general after a survey showed China’s Jan factory activity contracted at slower pace, as Beijing lifted tough COVID curbs, helping ease pressure on manufacturers (BABA, PDD, JD, BILI, NTES).

·     In telecom, TMUS Q4 revenue of $20.27B slightly missed estimate of $20.60B as EPS of $1.18 beat $1.10 and adds 927,000 monthly bill-paying phone subscribers; expects to add between 5 mln and 5.5 mln net monthly-bill paying subscribers in 2023.

 

Hardware & Software movers:

·     In video game players, EA shares fell after guides FY revs $7.25-7.35B vs est. $7.76B, cuts FY23 net bookings view to $7.07B-$7.17B; said that it has made the strategic decision to stop development on "Apex Legends Mobile" and "Battlefield Mobile."

·     In networking, JNPR reports Q4 revenue of $1.44B below consensus $1.48B; seeing strength in Enterprise still, but there was a change in language around normalized backlog to "$0.5-$1B" vs. prior "$0.9-$1B" and the removal of FY23 backlog >$1.8B noted Piper.

·     In software, APPS downgraded from Buy to Neutral; lowering PT from $20 to $16 at B Riley saying amidst ongoing softness in the app economy, they see headwinds ahead for APPS that present downside risks to consensus estimates; SPLK to cut 4% of workforce; RPD shares spiked after Reuters reported co is working with GS to explore potential sale.

·     Other movers: DOX reported strong 1Q23 results with revenues/EPS of $1,186mn/$1.45 versus the Street’s $1,176mn/$1.32 and reiterated FY rev guidance of 8% growth. DT rises early after Q3 adj EPS and revs beat and boosted year outlook.

 

Semiconductors:

·     AMD posted a drop in profit in its latest quarter, as operating expenses more than doubled and revenue linked to the PC market was cut in half on weaker demand; forecast Q1 revenue $5.3B plus/minus $300M vs. est. $5.48B citing fears of fewer orders.

·     SMCI slides as lower guidance offset a quarterly beat, guides 3Q net sales $1.42-1.52B vs est. $1.6B and adj EPS $1.88-2.14 vs est. $2.12.

·     WOLF and German chip supplier ZF Friedrichshafen will announce plans to build an electric vehicle chip plant in the Saarland region, Reuters reported.

·     Hard disk drive maker WDC issued March quarter guidance that fell well short of previous Wall Street expectations as sees 3Q revs $2.6-2.8B vs est. $3.0B, adj gross margin 9.0-11.0%, adj EPS loss ($1.70)-($1.40) vs est. ($0.30) – while HDD commentary mirrored that of STX (FQ2 marked a bottom for margins and sales), continued deterioration in NAND weighed far more heavily.