Closing Recap

Thursday, July 06, 2023

Index	Up/Down	%	Last
DJ Industrials	-365.92	1.07%	33,922
S&P 500	-35.15	0.79%	4,411
Nasdaq	-112.61	0.82%	13,679
Russell 2000	-30.67	1.64%	1,842

 

 

 

 

 

 

 

 

 

It was an ugly morning for US equities after the ADP employment data was much stronger than forecast and well above the prior reading, as well. Initial jobless claims were generally in-line, but the damage was already done. Good news clearly is not always good news when the implication is more rate hikes from the Fed. The 2-year yield popped back above 5% to hit the highest since 2007 and the implied probability of a July rate hike is now about 90%. Further, the Fed’s Logan picked a good day to deliver the message that she would have been ok with a June rate increase and sees more rate hikes likely necessary. She went on to say she believes the process of rebalancing the economy has been slower than expected and is skeptical about the lagged impact of past rate hikes. It’s the right day to be hawkish. Mid-day breadth was solidly in favor of decliners, at about 15:2, while every sector was losing ground. Consumer Staples was only about -0.30%, holding up the best, while Energy was the leader to the downside, at about -2.75% with the broader indices trading modestly off the lows.

 

In data today, following this morning’s ADP report, @KobeissiLetter notes some oddities: over the past two months, markets have shifted from pricing in four rate cuts to a potential case for rates rising to 6%, while somehow the Fed “pause” has become hawkish. Simultaneously, @bespokeinvest points out the ISM Services Prices Paid moved to the lowest since March 2020, while AAII bullish sentiment climbed to the highest since November 2021. Also on the more bullish side, @DataTrekMB highlighted S&P 500 sector correlations to the index have been fading all year to bullish territory and Street analysts have been raising their 2024 EPS estimates for most big US tech companies despite overall S&P 500 earnings estimate reductions. At least the multiple risk in the markets has eased a bit.

 

Stocks continued to move off late-morning lows into the final hour of trading but remained solidly in the red with both the S&P and NASDAQ off about 0.75%. Not much had changed sector-wise, with all sectors red, Consumer Staples still the best performer (XLP, -0.25%) and Energy still the largest laggard (XLE, -2.17%). Both Growth and Value also posting declines, with growth outperforming. The Russell 1000 Growth was -0.6% vs the Value counterpart at -1.05%. Breadth improved off the midday levels but was still a lackluster 5:1 decliners over advancers.

 

Economic Data

·     The June ADP private payrolls report showed a jump of +497K new jobs, well above the consensus for +228K and vs. +267K in May (revised from +278K). The report comes a day before the monthly Nonfarm payroll report Friday at 8:30 AM

·     Weekly Jobless Claims rose to 248K vs. 236K the prior week (est. 245K) as the 4-week moving average fell to 253,250 from 256,750 prior week and continued claims fell to 1.720M from 1.733M prior and insured unemployment rate unchanged at 1.2% in latest week.

·     The International Trade in Goods and Services deficit for May narrowed to (-$69.0B) from (-$74.4B) in April and compared to (-$69.0B) estimate. This reflected a decrease in the goods deficit of $4.8B to $91.3B and an increase in the services surplus of $0.7B to $22.3B. Exports for May were $247.10B vs. $249.00B and Imports were $316.10B vs. $323.60B.

·     ISM non-manufacturing for May shows PMI 53.9 in June, up from 50.3 in May and vs. 51.0 estimate while business activity index 59.2 in June vs 51.5 in May, prices paid index 54.1 in June vs 56.2 in May, new orders index 55.5 in June vs 52.9 in May, and employment index 53.1 in June vs 49.2 in May.

·     US JOLTS Job Openings Actual 9.824M below consensus 9.885M and prior 10.103M.

·     S&P Global June final composite PMI at 53.2 (vs flash 53.0) and S&P Global June final services PMI at 54.4 (vs flash 54.1).

 

Commodities, Currencies & Treasuries

·     August gold futures slid to their lowest settlement since March, declining $11.40/oz, or -0.59%, to $1,915.40. A big beat in today’s ADP jobs release prompted much speculation about incremental Fed rate hikes and weighed on gold in the process. Additional hawkish commentary from Fed’s Logan today and uncertainty around tomorrow’s job data also created pressure and concern about a test of the $1,900 level. Earlier, the World Gold Council stated gold prices are likely to remain steady in 2H as the Fed stops rate hikes, but that sentiment could be short-lived.

·     WTI August crude futures rode the roller coaster today to finish +$0.01/bbl to $71.80, while Brent futures slipped -$0.13, to $76.52/bbl. WTI slipped early but rallied into the afternoon following a bigger draw than anticipated in the EIA weekly inventory data. This was the third consecutive weekly crude inventory decline and was matched this week by declines in gasoline stocks and distillates. Upside on the day was limited by ongoing economic uncertainty after the better ADP report put Fed rate hikes back in play and recession concerns continued to swirl.

 

 

Macro	Up/Down	Last
WTI Crude	0.01	71.80
Brent	-0.13	76.52
Gold	-11.40	1,915.40
EUR/USD	0.0031	1.0882
JPY/USD	-0.50	144.14
10-Year Note	0.098	4.043%

 

 

Sector News Breakdown

Consumer

Consumer Staples, Retail & Restaurants:

·     In Beauty: COTY boosted its adjusted EBITDA guidance for the full year to $965M-$970M from the prior view $955M-$965M (est. $961.4M) and boosted Q4 rev growth to +12-15% on a like-for-like basis, up from its previous outlook for +10% growth.

·     In Restaurants: SG upgraded from Neutral to Buy at Bank America and raised tgt to $17 from $9 citing increasing foot traffic, prospect that same-store sales growth will see sustained momentum, and long-term plans to automate operations.

·     In Food & Beverage: KDP upgraded from Equal Weight to Overweight at Morgan Stanley with $36 tgt saying they are using an opportune entry point after pronounced stock underperformance, with valuation too low in its minds amid strong and highly visible Refreshment Beverage trends.

·     In Retail: BKE said June comparable sales -2.4% vs. -1.7% y/y and net sales $108.0 million, -1.8% y/y; TGT said it’s planning a Target Circle Week for back-to-school deals from July 9 to 15, followed by another week for back-to-college deals July 16 to Aug. 26.

 

Autos, Leisure, Gaming & Lodging:

·     In Autos: BMO Capital noted U.S. light vehicle SAAR was 15.7mm, slightly below ests of 15.8mm, but continues the strong year-to-date growth trend. The firm views this as positive for auto parts companies as it appears new vehicle supply continues to improve and despite aggressive rate hikes by the Fed, vehicle demand has not really weakened so far. Separately in suppliers, Bank America upgraded shares of APTV and BWA to Buy from Neutral. Ford (F) said Q2 total U.S. vehicles sales 531,662 units vs 483,688 units​ as Mustang Mach-E sales pace quickened at Q2-end with sales in June up 110% vs. last June and overall EV sales were up 35.5% in June.

·     In Gaming: GENI said it was extending an exclusive partnership with the NFL to distribute live game data and statistics to media and betting markets until the 2027-28 season; also gains the exclusive rights to distribute the NFL’s watch and bet live video feeds to sportsbooks.

·     In Food Delivery, UBER, DASH and Grubhub sued New York City on Thursday to block a new law that sets minimum wages for food-delivery workers, escalating a battle between the apps and the city over how the industry should be regulated.

 

Homebuilders, Building Products, Home Furnishing:

·     U.S. mortgage market index in latest week fell -4.4% according to the Mortgage Bankers Assoc as the purchase index falls -4.6% and the refinance index falls -4.1% while the average 30-year mortgage rate rises 10 bps to 6.85% in June 30 week.

·     In roofing: BECN ($85 tgt) and OC ($135 tgt) ests and tgt raised at Truist citing notable 2Q23 storm damage that will help shipments; a much more benign downturn in consumer spending on durable goods that will result in limited price pressure than it originally thought.

·     In Building Materials: JP Morgan downgraded VMC & MLM to Neutral from Overweight and cut the ratings on SUM & EXP to Underweight from Neutral, lowering its expectations for the sector given limited room for upside after the recent rally (+15% 1M and +33% YTD), which has left valuations stretched and trading above their 5Y + 1SD average.

 

Energy

·     In Oil Major and E&P: XOM said it sees change in gas prices to negatively impact Q2 upstream earnings by $2.2B-$1.8B vs Q1; said gas prices to lower upstream earnings by $2 billion; says refining margins to lower earnings by $2.1 billion.

·     In Solar: CSIQ upgraded from Neutral to Buy at UBS and raise tgt to $50 saying the firms SOTP analysis indicates the value of CSIQ’s holdings in CSI Solar A-Shares is likely underappreciated by the market and firm sees upside potential driven by a narrowing of the valuation Gap. Susquehanna updates ests into Q2 for ENPH, NOVA, RUN, SEDG, SPWR saying recent industry checks and conversations with installers and equipment providers suggest softening demand across the U.S. market. Overall, remains Positive on the longer-term prospects for the solar sector but are tempering its growth expectations, and thus, lower price targets across the board.

·     In Utilities & Alt Energy: Citigroup initiates coverage on hydrogen focused companies with an in-depth look at the sector. Initiate coverage of PLUG with Buy/High Risk and BLDP with Neutral/High Risk. DUK announced the sale of its commercial distributed generation business to ArcLight for an enterprise value of $364m and cash proceeds of $259m net of tax equity.

 

Financials

Banks, Brokers, Asset Managers:

·     In Banks: BAC announced plans to increase its quarterly dividend 9% to $0.24 per share; in research, Raymond James upgraded TFC to Outperform ($36 tgt) reflects what it views as an attractive entry point, upgraded ASB to Outperform ($20 tgt) as it believes current valuation levels are assuming unrealistic credit losses, upgraded FHN to Outperform ($13 tgt) on reset earnings expectations, better than peer capital ratios and downgraded HBNC to Market Perform.

·     In Advisors: BLK resubmitted its filing through Nasdaq to include new details to launch an exchange-traded fund backed by bitcoin.

·     In FinTech: FIS accelerates plan to split in two with deal to sell Worldpay to GTCR at a valuation of $18.5 billion (FIS previously announced plans to spin off its merchant business, which largely consists of Worldpay, into a separate business) https://tinyurl.com/2h2fkfsm

·     In Crypto: MARA said it produced 979 bitcoins (BTC) in June, a 21% decrease from May; production last month was up six-fold from the year-earlier period. BTBT said produced 119.1 BTC, a 5% increase compared to the prior month

·     In Credit Cards: Citigroup said its Credit Card Data for the week ended 7/1 weekly aggregate purchase volume growth was down -2% y/y, flat from -2% y/y with the prior week, and flat from -2% y/y in the prior two weeks. Two-week trailing spends decreased to 1.9% from -1.7% in the prior week and four-week trailing spend decreased to – 1.6% from -1.0% last week.

·     In Payments: AFRM was downgraded from Neutral to Underweight at Piper with $11 tgt saying they expect persistently higher rates to pressure operating margins as AFRM needs to hold more loans on balance sheet.

·     In brokers & Exchanges: TW reports June 2023 total trading volume of $29.3 trillion and average daily volume of $1.38 trillion; MKTX said that its Q2 high-grade average daily volume is estimated to be $5.7B, with estimated market share of 20.7%. ICE said June Total average daily volume (ADV) up 5% y/y; Energy ADV up 26% y/y; open interest (OI) up 12% y/y, including record OI of 50.4M lots on June 23; Total Ags & Metals ADV up 32% y/y; OI up 19% y/y.

·     In Insurance: MTG downgraded to Sector Perform at RBC Capital on valuation, reflecting its view that the stock has neared fair value in the current macro risk/reward environment. EBIX said it was in "advanced stages" in the sale of part of its assets.

 

Healthcare

Biotech & Pharma:

·     ASLN released new data from a clinical study of eblasakimab, an atopic dermatitis treatment. Among patients treated with the highest dose of the monoclonal antibody once every four weeks, 63% achieved at least a 75% reduction in an eczema area and severity index, the company said in a release, compared to 31% on placebo.

·     BLCO said it has acquired JNJ’s eye and contact lens drops for $106.5 million in an all-cash deal to expand its portfolio of over-the-counter eye care products.

·     CRBU shares rise after saying PFE made a $25M equity investment in the company by purchasing 4,690,431 of common shares at a price of $5.33/share.

·     CRON is exploring options that include a potential sale after attracting acquisition interest, people familiar with the matter told Reuters’, sending shares higher this afternoon.

·     MRUS announced Zeno received breakthrough therapy designation from the FDA for treatment of NRG1 fusion non–small-cell lung cancer following progression on prior systemic therapy.

·     NBIX upgraded from Underperform to Market Perform at BMO Capital and raised tgt to $96 primarily supported by its improved confidence in Ingrezza durability following a survey of psychiatrists. BMO also sees an upside in key readouts in 4Q23 (CAH, FOS, and anhedonia).

·     ROIV shares rose after Bloomberg reported the company is attracting interest from large pharmaceutical companies for its treatment of inflammatory bowel disease, RVT-3101, which could be worth more than $7B. https://tinyurl.com/y2pr86fa

·     TEVA upgraded from Sell to Neutral at UBS and raise tgt to $8 from $7 as expects Teva’s GM to recover in the near term, some of which is priced in already after stock’s apparent bottoming.

·     VBIV and Brii Biosciences expand Hepatitis B partnership to address both prevention and treatment in license and collaboration agreements for up to $437M w/royalties; announces concurrent public offering, registered direct offering.

 

Healthcare Services & MedTech movers:

·     In MedTech: TMO said it would acquire data intelligence company CorEvitas from Audax Private Equity for $912.5 million in cash and expects to add revs of $110M in 2023.

·     In MedTech Research: Cleveland Research downgrades TMO, WAT, A & MTD to Neutral and lower organic growth and EPS estimates and now see limited upside opportunity in 2H23 and 2024 saying research points to incremental budget tightening from Pharma and Biotech accounts over the last 60 days further weighing on channel outlooks.

·     In Healthcare IT: MDRX downgraded to Hold from Buy at Argus citing the company’s cut in 2022 revenue and EPS guidance alongside the delay in the release of its Q4 results due to errors in reporting over the past six quarters.

 

Industrials & Materials

·     In heavy duty truckers: (CMI, PCAR) ACT Research released preliminary June Class 8 net order figures of 16,200 units. Orders in June increased 5% y/y and 4% seq. Adjusting for seasonality, June net orders were ~19,600 units (+8% y/y and +3% seq.).

·     In Aerospace & Defense: AER said that it signed financing transactions for ~$1.1B in Q2; the company had signed financing transactions for ~$4.2B in 2022. JOBY said it has submitted all of its certification plans to the Federal Aviation Administration.

·     In metals: overall, more selling pressure continued from day prior after China announced a decision to restrict exports of two metals – gallium, germanium – used in chips and EVs, raising tensions with the US while China Caixin services PMI came in at a soft 53.9 vs 56.2 expected, and 57.1 prior. Steels, copper, etc. all weak. PT Freeport Indonesia, a unit of FCX said it has not yet obtained a government permit to continue exporting its materials, risking overcapacity at its storage facilities in the eastern region of Papua.

 

Technology

Semi’s, Hardware & Software movers:

·     Twitter has threatened to sue META over its new Threads platform, Semafor reported on Thursday, citing a letter sent to Facebook parent’s CEO Mark Zuckerberg by Twitter’s lawyer Alex Spiro.

·     MSFT names Morgan Stanley Top Pick within large cap Software as the co is best positioned to monetize the expansion of biz processes that can be automated by gen-AI; PT raised to $415 from $335 (2nd highest on street)

·     NVDA Samsung/TSM: Digitimes says NVDA may choose Samsung to produce some of its GPUs used for AI, as TSMC’s production capacity for these chips is reaching the limit.

·     HUBS downgraded from Overweight to Neutral w/ $520 PT from $482 at Piper saying the risk-reward on HUBS appears balanced after the +80% YTD move.