Closing Recap

Thursday, June 27, 2024

U.S. stocks again finish mixed, this time with the Smallcap Russell 2000 outperforming behind a dip in Treasury yields and into tomorrow’s key PCE inflation data. The Nasdaq stays strong as tech leader rotation changes weekly as NVDA has finally cooled off after its massive run; AAPL was leader over the last 2-weeks and now AMZN, TSLA and GOOGL taking the reigns the last few days keeping the Nasdaq higher. The S&P 500 finished flat on the day, chopping between gains and losses heading into Friday. Reminder that tomorrow is the end of the week, month, quarter and 1H alongside the Russell 2000 rebalance, with major averages on track for good month, quarter and YTD figures. NYSE breadth was slightly positive with Communications, REITs, and Consumer Discretionary higher and Staples, Healthcare, Financials lower.

The dollar fell against a basket of currencies and U.S. Treasury prices rose after economic data. Gross domestic product (GDP) increased at a slightly upwardly revised 1.4% annualized rate last quarter but was down from the 3.4% rate in the fourth quarter. Core capital goods orders drop -0.6% in May, and the goods trade deficit widens -2.7% while inventories rise. The number of people on jobless rolls jumped to a 2-1/2 year high in mid-June, suggesting that labor market conditions were easing, while first-time applications for U.S. unemployment benefits drifted lower.

After today’s GDP data/jobless claims and into tomorrow more current May PCE/Core PCE data, where are we on rate outlook? The Federal Reserve has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range since last July. Financial markets expect the U.S. central bank to start its easing cycle in September, though policymakers recently adopted a more hawkish outlook. The Fed has hiked its policy rate by 525 basis points since 2022 to quell inflation. Next up is tomorrows May Personal Consumption Expenditures (PCE) report, a measure of the spending of good and services by households tomorrow at 8:30 AM ET. Estimates are for headline PCE M/M to hold steady (vs. prior +0.3%) and PCE Index Y/Y to rise +2.6% (vs. prior +2.7%). The core PCE M/M expected to rise +0.1% (vs. prior +0.2%) and Y/Y to rise +2.6% (vs. prior +2.8%) along with monthly Personal Income and Spending data.

• In the GDP inflation data, final Q1 PCE price index +3.4% (vs. prior estimate +3.3%) highest since Q1’23, while U.S. final Q1 core PCE +3.7% (vs. prior estimate +3.6%). U.S. final Q1 PCE price index ex-food/energy/housing +3.3% and U.S. final Q1 PCE services price index ex-energy/housing +5.1%.
• Weekly Jobless Claims fell to 233,000 Jun 22 week (consensus 236,000) from 239,000 prior week while the 4-week moving average climbed to 236,000 from 233,000 prior week (previous 232,750). Continuing claims reported at 1.839M vs. est. 1.824M.
• May Durable Goods Orders rose +0.1% (consensus -0.15%), May Durables ex-transportation orders -0.1% (consensus +0.2%) vs April +0.4%; May Durables ex-defense orders -0.2% vs April -0.5% (prev unchanged); May general Machinery orders -0.5%, electrical equipment -0.4%, defense aircraft/parts +22.6%, May nondefense cap orders ex-aircraft -0.6%, (cons +0.1%) vs April +0.3% (prev +0.2%).
• May Pending Home sales fall (-2.1%) M/M; vs. est. up +0.5% and fall (-6.6%) from previous year. Pending home sales fell in the densely populated South and the Midwest, which is considered a more affordable region. The rose in the Northeast and West.

• Aug gold prices rise $23.40, or about 1% to settle at $2,336.60 an ounce.
• Treasury yields slumped after hitting their best levels since early June for the 10-year, pulling back to 4.28% after highs above 4.34% on Wednesday, following mixed economic data earlier.
• The U.S. Treasury sold $44B in 7-year notes at high yield 4.276%, vs. 4.279% when issued prior, with a bid-to-cover ratio 2.58 (vs. prior 2.43) as primary dealers take 11.87% of U.S. 7-year notes sale, direct 18.48% and indirect 69.65%.
• In Crypto: Solana prices surged after asset-management firm VanEck filed with the SEC for a spot exchange-traded fund (ETF) based on the crypto-currency.

• In Food & Beverages: MKC posted better-than-expected earnings for Q2 and backed its outlook for the year as it anticipates volume improvement in the second half of the year. Bernstein noted the Beer industry (STZ, BUD, TAP, SAM) endures another difficult month as retail sales continue to decline YoY (-0.7%). US Beer/FMB/Cider volumes declined -2.5% in the 4wk trailing to 15-Jun-24 in Nielsen-tracked channels. This is a tad better than the last two months, but still -2.8% YoY for 12-wks trailing Price-mix growth of +2.2% in the 4wk trailing (+2.2% on 12wk trailing) was in-line sequentially. Overall $ sales growth declined -0.7% in the 4wk (-0.3% on 12wk trailing), in-line with May.
• In Consumer Products: In beauty, Loreal (LRLCY) CEO trimmed expectations for growth in the beauty market, attributed to lingering weakness in demand out of China. Saying now expects the market to grow by 4.5% to 5% from an earlier estimate of 5%, Bloomberg reported (shares of EL fell in sympathy).

• In Energy: SM entered into an agreement to acquire the Uinta Basin oil and gas assets owned by certain entities affiliated with XCL Resources, LLC for an unadjusted purchase price of $2.55 billion. Concurrently, NOG will acquire an undivided twenty percent (20%) of the oil and gas assets of XCL for $510 million, resulting in a $2.04 billion purchase price net to the Company for an undivided 80% interest of the assets. In Utilities, CTRI shares tumbled, downgraded to Underperform at Bank America after CEO unexpectedly steps down to become CEO at AEP.
• In Metals and Mining: WS posted 4Q adjusted EBITDA of ~$86M vs. $98.4M y/y; said Q4 Gross margin decreased by $19.2M y/y to $131.0M; Q4 Operating income decreased $22.5M over the prior year quarter to $67.3M. Keybanc noted results were favorably impacted vs. model by inventory holding losses of only $3.4M, or $0.07/share and said core profitability of $87/ton in EBITDA (ex: inventory holding losses) smashed their n-t expectations of $60-$65/ton. Gold miners (AEM, AU, NEM, GOLD) saw strength as gold prices advanced over 1%.
• In Aerospace & Defense: shares of AVAV declined after posting a 57% drop in Q4 earnings to $0.43 (but better than the 78% drop expected) vs. est. $0.22 while revs rose 6% y/y to record $197M while noted the company’s funded backlog declined to $400.2M as of April 30, compared to $424.1M the year prior; said that it is on track to hit nearly 12% top line growth in fiscal 2025 and expects revenue to range from $790M-$820M (vs. est. $804.5M).

• Trust banks: BK was upgraded to Outperform from Market Perform – top idea in trust banks at KBW citing scale, diversification and expectations for widening profitability Gap to peers led by strong expense control. Moreover, KBW expects meaningful buybacks and an industry-leading total payout ratio north of 100%. The firm raised NTRS FY24 estimates due to better NII and buybacks, but lowered FY25 by $0.20 to $6.80 due to expenses. KBW lowered STT 2024 and 2025 estimates due to lower revenue outlook.
• Credit Cards: AXP, COF, DFS all passed the Federal Reserve Board’s 2024 Dodd-Frank Supervisory Stress Test (DFAST), results of which were released after market close. The stress capital buffer (SCB) was unchanged at the minimum 2.5% for AXP Bank America estimates COF and DFS’s SCB increased 70bps and 50bps to 5.5% and 3.0%, respectively. While passing is an incremental positive, investors will need to absorb the higher SCBs.
• In FinTech: Evolve Bank and Trust confirmed it was the victim of a cybersecurity incident from Cybercrime group Lockbit 3.0 that involved customers’ data being illegally released on the dark web. "We will offer all impacted customers (end users) complimentary credit monitoring with identity theft protection services. Those affected will be contacted directly with instructions on how to enroll in these protective measures," the spokesperson added.
• In REITs: Bloomberg reported that nearly 25% of all US office space will be empty by 2026 as working from home persists, wiping out $250 Billion in Commercial Property Value. Office-vacancy rates are expected to rise to 24% from 19.8% in the first quarter of this year in the US, reducing revenue for office landlords by between $8 billion and $10 billion when combined with the impact of lower rents and lease turnovers, https://tinyurl.com/4t6bex8b

• ELAN shares dropped as provided an update last night on its innovation pipeline, indicating that all major technical sections for its FDA application for Zenrelia were complete as of late June, with expected US launch in 4Q24 (vs. expectations for 3Q prior), while also noting it expects the US label will include a boxed warning on safety which could slow the product adoption curve in the US and limit expected treatment days by approximately 25%.
• HIMS shares tumbled after Hunterbrook Capital said it was short HIMS, saying Hims & Hers sells knockoff GLP-1 weight loss drugs through a loophole that could end at any time – and relies on a sole GLP-1 supplier with previously unreported ties to fraud and bankruptcy. https://tinyurl.com/27xccj7p
• RXRX shares tumbled as 30.8M share Spot Secondary priced at $6.50.
• TEVA positive mention at Jefferies as reiterate Buy and $23 tgt saying believe shares are not appreciating the strength of key products, biosimilar approvals and progress on the innovation pipeline.
• VRNA said the U.S. FDA approved its inhaled therapy Ohtuvayre as maintenance treatment for a chronic lung disease; it is the company’s first and provides a new inhaled non-steroidal treatment for chronic obstructive pulmonary disease.
• VKTX was initiated at Overweight and $105 tgt at Morgan Stanley saying believes Ph2 data for VK2735 and VK2809 suggest a potential best-in-class profile in obesity and Nash/MASH, respectively, supporting two separate blockbuster market opportunities, and it expects near-term updates to drive further upside.
• WBA lowers FY adj EPS to $2.80-$2.95 from prior view $3.20-$3.35 after Q3 EPS results missed; said will close certain underperforming U.S. stores as part of its strategic review and simplify its healthcare portfolio in the country; said repositioning U.S. retail store footprint, acting across about 25% of network over 3 years.
• In Life Sciences: TXG was downgraded from Outperform to Peer Perform at Wolfe saying in a reversal of Q1 sentiment, expectations are soft into the quarter and there is (1) some anticipated continued impact on single cell from the GEM-X transition (2) cannibalization of budgets due customers prioritizing spatial projects (3) price reductions in single cell. Wolfe also upgraded QGEN from Peer Perform to Outperform, incrementally more confident in potential to outperform its peers over the next year, as mgmt. has laid out a plausible path to reach >7% organic growth and >31% OM (’24-28). Lastly, Agilent (A) was downgraded to Peer Perform at Wolfe saying the potential for meaningful upside to expectations appears limited as it believes potential drivers to revenue and EPS upside are adequately captured.
• In the RSV Sector (Respiratory Syncytial Virus), Bank America said the ACIP meeting took a more cautious view on the RSV vaccines than they had expected as overall recommendation limited to high risk 60-74 adults and all over-75 adults, from prior shared clinical decision making in over-60’s. MRNA recommended as expected in the same population creating risk to consensus Arexvy estimates. GSK immunogenicity 3rd season booster data showed an increase in antibody titers, above the level demonstrated with its 2nd season booster but below the initial shot. GSK expansion into 50–59-year-old comorbid adults wasn’t accepted, with ACIP wanting more data. BAML continues to see negative risk reward to Arexvy consensus for 24E and outer years based on competitive threats.

• In Software: seeing recent strength in the sector heading into month, quarter, and 1H end, with rebounds in names like CRM, ZS, PANW, CRWD, SNOW, ORCL, DDOG, and others.
• In social media: TechCrunch reported TikTok is gearing up to challenge Amazon’s (AMZN) Prime Day event in the month of July. The social network announced on Thursday that TikTok Shop is holding a “Deals For You Days” sales event in the U.S. starting on July 9.
• In Semiconductors: MU shares fell; reported strong FQ3 results, which beat, and guided FQ4 in line with expectations; Q3 adj EPS $0.62 vs. est. $0.50 and revs beat at $6.81B, +82% y/y vs. est. $6.67B; Q3 adj operating income $941M vs. loss $1.47B y/y while expenses rose 13% y/y to $976M; guides Q4 adj. EPS $1.00-$1.16 vs $1.05 est. and revs $7.4-$7.8B vs est. $7.6B. FQ3 pricing remained robust with both DRAM/NAND pricing 20% q/q.