Closing Recap

Wednesday, July 12, 2023

Index	Up/Down	%	Last
DJ Industrials	87.85	0.26%	34,349
S&P 500	33.11	0.75%	4,472
Nasdaq	158.26	1.15%	13,918
Russell 2000	20.02	1.05%	1,933

 

 

 

 

 

 

 

 

 

US equities futures were already trending a bit higher pre-CPI, but really took off after data came in a bit tamer than forecast and below last month. June Core CPI rose +0.2% m/m vs the estimate of +0.3% and prior +0.4%, while the yr/yr Core rose +4.8% vs an estimate of +5.0% and prior +5.3%. Mid-morning breadth was almost 4:1 in favor of advancers, with all S&P sectors in the green. Leaders were Materials, Technology, Consumer Discretionary and Communications (each gaining more than 1.2%). Healthcare, Industrials and Consumer Staples lagged (each up less than 0.4%). Despite the celebration in equities and more talk about soft landing potential for the economy in some circles, many strategists continue to expect weakening in 2H and the implied rates expectations continue to hold about an 88% probability of a +25bps Fed hike at the July meeting. The first implied rate cut has been pushed out to the March-May 2024 timeframe vs multiple cuts priced in for 2H23 just a month or two ago.

 

Data-wise, @charliebilello starts us out, noting the S&P 500 is now 3% higher than where it was when the Fed started hiking rates in March 2022. So higher rates, higher equities, improving CPI, but plenty of room for debate. @fundstrat says June CPI shows a downside break in inflation which should result in the future path of Fed hikes likely lower and support stocks, while @GordonJohnson19 gives multiple reasons not to take a victory lap too early: “Here’s what we having moving forward: (a) what happens when Mr. Market asks itself WHY was CPI weak (reason is… demand sucks and so will earnings), (b) coming Q2 earnings, which will be an UTTER disaster, (c) coming debt refis for corps, which will be a disaster and cause mass firings (company’s will blame them on non-existent "AI" tech), (d) the inflation comps get MUCH harder in July and for the rest of the year, (e) OIL is already moving higher, which means higher inflation, and (f) liquidity is being pulled from the system.” Perhaps uncertainty and debate will be good for stocks instead of a strong consensus and complacency which often is a recipe for surprise and disappointment. We will learn much more in the upcoming earnings season.

 

Stocks were off highs, but generally holding gains into the final hour of trading. Breadth remained strongly in favor of advancers at a little more than 3:1 and only the Healthcare sector (XLV) had fallen into the red. Materials (XLB, +1.5%), Utilities (XLU, +1.5%), Technology (XLK, +1.15%) and Real Estate (XLRE, +1.15%) were sector leaders. Growth and Value both enjoyed solid gains, with Growth the stronger on a relative basis. The Russell 1000 Growth gained +1.06% vs the Value counterpart at +0.55%.

 

Economic Data

·     June Consumer Price Index (CPI) headline M/M rose +0.2% vs. est. +0.3% (and prior +0.1%)

·     June CPI Headline Y/Y rises +3.0% vs. est. +3.1% (prior +4.0%).

·     Core CPI for June, ex: Food & Energy M/M rose +0.2% vs. est. +0.3% (prior +0.4%)

·     Core CPI for June Y/Y rose +4.8% vs. est. +5.0% (prior +5.3%)

·     Rent and housing costs continue to be a key driver of inflation, accounting for more than 70% of the rise in consumer prices during June, the Labor Department said.

·     Shelter costs were up a seasonally adjusted 0.4% over the month, a higher pace of increase than overall inflation, which was 0.2% in June.

 

Commodities

·     August gold futures climbed to their highest since mid-June, settling +$24.60/oz, or +1.27%, to $1,961. Weaker CPI data pushed the US Dollar and Treasury yields lower, while lifting equities and gold, despite little change in the implied probabilities of a Fed hike at the July meeting. Expectations continue to hover around 88% for a +25bps hike, but also are looking for a pause for the remainder of the year beyond any July move. We did hear from a few Fed speakers today, but the commentary generally was not new and not sufficiently hawkish to displace CPI-driven expectations.

·     WTI August crude futures posted back-to-back gains, settling +$0.92/bbl, or +1.23%, to $75.75. Brent also gained, finishing +$0.71/bbl, or +0.89%, at $80.11. Growing expectations we will see production cuts from Russia and Saudi Arabia have supported prices despite a big, surprise inventory build in today’s EIA data (+5.946Mm vs forecast -0.05Mm). US Midwest refinery utilization climbed last week to the highest since July 2021, while West Coast utilization also rose to its highest since September 2018. US crude stocks in the SPR fell again to the lowest level since August 1983.

 

Currencies & Treasuries

·     The Dollar Index (DXY) fell to lowest since April 2022 around 100.60 (down over -1%) after yen rallies past 140-handle for the first time since mid-June. The US dollar hit a six-week low vs yen, last down 1.4% at 138.47 yen, all following the softer than expected CPI June inflation data, which could mean U.S. interest rates stop rising after this month. A 25 basis-point rate increase at the Fed’s meeting later this month is still highly likely, but chances of further hikes have eased. The Euro rose +0.8% to a 2-month high above 1.11 and Sterling near 15-month high around 1.30.

·     Treasury yields tumbled, with the 10-year falling over 11-bps to 3.86% and the shorter-term 2-year yields plunging about 15-bps to 4.75% after the weaker CPI inflation data for June lowered chances of additional rate hikes from the Fed after an expected one in July.

 

 

Macro	Up/Down	Last
WTI Crude	0.92	75.75
Brent	0.71	80.11
Gold	24.60	1,961.70
EUR/USD	0.0130	1.1135
JPY/USD	-2.05	138.32
10-Year Note	-0.117	3.865%

 

 

Sector News Breakdown

Consumer

Autos:

·     In Autos: STLA was upgraded to Buy from Neutral at Bank America; GM price tgt raised to $89 from $85 at Citigroup and opened a "30-day positive catalyst watch" on the shares ahead of the Q2 report as firm maintains a more constructive stance on U.S. automaker. LCID said Q2 vehicles delivered 1,404, below est. 1,873 and produced 2,173 vehicles.

·     In auto parts: HLLY upgraded ay Bank America and JPMorgan – upgraded at Bank America to Buy and $6 tgt as sees sales momentum, improved sourcing and to Overweight and $7 tgt at JPMorgan based on 1) topline upside in 2023/2024 given conservative guidance, the Sniper 2.0 release, and potential upside from reducing past-dues, as well as margin upside.

 

Retail, Consumer Staples & Restaurants:

·     In retail: AMZN shares active as consumers spent $6.4 billion on the first day of the prime day event representing 5.96% growth year-over-year – Adobe digital economy index. TJX was upgraded to Buy from Hold at Loop Capital and raise tgt to $95.

·     In Beauty: COTY rises early on reports Kim Kardashian is in talks to buy back the minority stake of her beauty company she had sold to beauty and fragrance seller Coty, the WSJ reported. The sale price hasn’t been determined and talks could still break down https://tinyurl.com/2p9x2f6y

·     In Restaurants: DPZ signs food-delivery deal with UBER whereby the pizza chain will list its menus on the ride-share co’s Eats & Postmaster food delivery apps across 28 of the chain’s markets, including the US, UK & Canada. TD Cowen said they are most constructive on QSR and WING into earnings & most cautious on WEN. BJRI was added to the best ideas list at Wedbush, as continues to view BJRI’s 2023 SSS growth and margin expectations as overly conservative.

·     In Food: JBS is moving ahead with a long-delayed plan to go public in the US. The world’s largest meat supplier has filed a registration request to the U.S. SEC and will seek shareholder approval to trade its stock on the NYSE through a direct listing.

 

Leisure, Gaming & Lodging:

·     In casinos/gaming: sector been strong in July led by DKNG shares which were upgraded to Buy from Neutral at Bank America today (tgt to $35 from $25) as accelerating product and revenue momentum are on the cusp of driving an inflection in margins and profitability. Strength this month from likes of WYNN, LVS, PENN, MGM among others.

·     In movie theatres/leisure: CNK shares rise early after B Riley upgraded to Buy from Neutral with $23 tgt just four weeks after firm downgraded noting they now see possible upside in 2Q results in early August, and confidence in continued over-indexing relative to the exhibition peer group.

 

Homebuilders, Building Products, Home Furnishing:

·     The interest rate on the most popular U.S. home loan leapt back over 7% last week for the first time since last fall as financial markets adjusted to an expectation that the Federal Reserve would need to keep its benchmark rate higher for longer to beat back inflation. The average contract rate on a 30-year fixed-rate mortgage jumped 22 basis points to 7.07% in the week ended July 7.

·     U.S. MBA mortgage applications rose 0.9% m/m in the week ending July 7, after falling -4.4% in the prior week. Purchases rose 1.8% after falling -4.6% in the week ending June 30. Refis corrected -1.3% after already falling -4.1% in the previous period. The average 30-year fixed rate lifted to 7.07% from 6.85% – MBA data.

·     In Real Estate: RDFN was downgraded from Neutral to Underperform at DA Davidson with $10 tgt on valuation noting shares are up 260% thus far in CY’23 and up ~47% over the past month, making RDFN the top performing name in DADA’s broader Prop Tech coverage by a wide margin (shares are up 31% just this week).

 

Energy

·     Oil stocks: energy stocks among leaders as Brent crude tops $80 per barrel for the first time since May, and as CPI inflation cooled again in June (below estimates and prior month reading), lifting commodity related stocks – energy, materials among leaders in the S&P.

·     Renewable Energy and Clean technology: Raymond James upgraded SPWR from Outperform to Strong Buy with $21 tgt following what they view as the stock’s excessive weakness due to the company’s overweight to the California market. The firm downgraded GTLS from Strong Buy to Outperform, with the story having become somewhat less contrarian as investor concern subsides vis-a-vis the balance sheet and cut ITRI as well to Outperform, with the easy money having been made now that the long-running supply chain headwinds are noticeably dissipating.

 

Financials

Banks, Brokers, Asset Managers:

·     In Brokers: Morgan Stanley upgraded LAZ to Overweight and JEF to Equal Weight saying capital markets are starting to show signs of life, driving an improved outlook for M&A in 2024. The firm upgraded its Midcap Advisors industry view to Attractive and raised tgt by 25% median.

·     In Crypto: COIN downgraded from Overweight to Neutral at Atlantic Equities but raise tgt to $80 noting the stock has rallied 60% off recent lows, and the risk/reward looks less attractive at this level given continued regulatory challenges ahead and the "surprisingly weak volume backdrop."

·     In Payments: shares of payments processors and consumer lenders (V, MA, PYPL, SQ, LC, AFRM) in the U.S. rose after data showed consumer prices in June rose below economists’ forecast, posting their smallest annual increase in more than two years as inflation continued to subside.

·     In HR/Payroll: PIXY shares tumbled after pricing its $3.1M public offering at $1.50; in Q2 preview, BMO Capital raised price tgts for CDAY, PCTY, PYCR saying they sees an impactful earnings season ahead for the HCM/payroll group with guides from the three all elevated importance as investors calibrate expectations for a more normalized growth trajectory into CY24.

 

Healthcare

Biotech & Pharma:

·     AZN and Daiichi Sankyo’s Enhertu has been approved in China as a monotherapy; AZN also upgraded to Buy at UBS.

·     ILMN was hit with a €432 million ($476M) fine for acquiring cancer-test provider Grail Inc. before securing regulatory approval from the European Union. The fine is the highest the European Commission could impose.

·     RXRX shares surged after saying it received a $50M investment by NVDA, which was executed as a private investment in public equity and said it plans to accelerate development of its AI foundation models for biology and chemistry.

 

Healthcare Services & MedTech movers:

·     In Medical Technology: SILK shares tumble after the Centers for Medicare and Medicaid Services (CMS) posted a proposed national coverage determination for percutaneous transluminal angioplasty of the carotid artery concurrent with stenting; prompts downgrade from JPMorgan. ANGO reported mostly in-line Q4 EPS, sales, and margins, but guides 2024 sales in range $328M-$333M, below est. $353M on larger EPS loss. INMD raised Q2 and FY23 rev outlook. IART upgraded to Buy from Hold at Jefferies as views shares as oversold and think 2Q23 updates could provide some clarity on recovery scenarios.

·     In Managed care/retail: CVS Caremark and GDRX said to launch Caremark® Cost Saver™ to help lower out-of-pocket drug costs for CVS Caremark clients’ members.

·     In Healthcare Facilities: ACHC filed an 8-K disclosing that it may need to pay material financial damages relating to a jury decision in New Mexico State District Court. Specifically, on July 7th, a jury awarded the plaintiff compensatory damages of $80 million and punitive damages of $405 million in a lawsuit that went to trial in which ACHC was a named defendant.

 

Industrials & Materials

Transports

·     In transports: The Dow Transport Index hit fresh 52-week highs for a second day, moving above 16,000 briefly before pulling back; weakness in airlines (AAL, JBLU, UAL) after airline fares were -8% in CPI data; also note DAL expected to report tomorrow morning. In trucking, RXO downgraded from Peer Perform to Underperform at Wolfe Research noting stock is up 28% YTD, while C23- C24 Consensus EPS estimates have declined 46% and 18% YTD, respectively, as truck brokers broadly face significant pressure on gross profit per load. The Cass Freight Index slides 1.9% on a seasonally adjusted basis in June to its lowest level since August 2020. Cass says declining real retail sales trends and destocking by retailers are major headwinds. Freight spending is also falling on lower volumes and sagging prices. The Cass expenditures index retreats 2.8% from May to June, leaving it down 24.5% from June 2022.

·     In Aerospace & Industrials: GWW downgraded from Buy to Neutral at UBS saying they no longer see low-risk EPS upside and it thinks the recent re-rating now gives the equity credit for a sustained higher level of market outgrowth. CACI was upgraded to Buy at Jefferies saying they believe they at inflection in organic growth from 0.1% in FY22 to 6.1% in FY23 to 5.5% in JEFF’s FY24 est. and that recent bookings provides a high degree visibility to organic growth, supporting JEFF’s 4.6% CAGR from FY23-FY25.

 

Technology

Hardware & Software movers:

·     In Networking: CSCO was downgraded from Buy to Neutral at Bank America and reduces its estimates to reflect its concerns over the near-term trends.

·     In Software: VMW shares rose on Tues after the FT said the EU would approve the Broadcom acquisition; note the deal still requires approval in the US and UK.

·     In Components: DAKT rises after reporting Q4 sales +29.4% y/y to $209.9M vs. $162.2M and said its supply chain and manufacturing capacity are improving.

·     In IT Services & Consulting: LPSN shares jumped after saying its founder and CEO Robert LoCascio will step down, effective Dec. 31, and will also resign as its board’s chair.

 

Semiconductors:

·     The European Union cleared AVGO’s acquisition of VMW, worth some $77 billion at current prices, with a green light for the takeover from a historically tough-on-tech regulator being the latest sign that tech deal momentum could build.

·     Chip designer Arm is considering NVDA as an anchor investor in IPO, the Financial Times reports.

·     AMD gets another price target bump as TD Cowen goes to $135 per share from $115.