Closing Recap

Wednesday, May 15, 2024

US equities trended flattish overnight ahead of this morning’s all-important CPI reading. Core mo/mo and yr/yr readings matched expectations and, along with softer retail sales, eased investor fears of a more hawkish Fed in the near term, resulting in a pre-market pop in both S&P and Nasdaq futures. Early action continued the gains with breadth a bit better than 2:1 favoring advancers. Coincidentally, the Fear and Greed Index has moved back to Greed at 59/100 versus 42 (Fear) and 39 (Fear) a week and month ago, respectively. After a stronger open in small caps, some profit taking had IWM +0.52%, trailing slightly behind SPY +0.61% and QQQ +0.68%. Interest rate sensitive sectors led the S&P sector ETF gainers early with Real Estate and Utilities at the top, while laggards included Materials, Consumer Discretionary and Energy as the only groups in the red.

Data-wise, following the more dovish CPI, the implied probability of no change from the Fed in June stood at 90% and the July probability was 71% (versus 61% pre-data). Looking out further, the market continues to price in Fed cuts in the back half of the year, with the December implied rate at 4.825%. Separately, on inflation, @jaykaeppel notes inflation is a problem for consumers but currently is not a problem for stocks, with his inflation model at its most bullish level. He said everything but, “soft landing.” Similarly, on retail sales, @RBAdvisors notes core retail sales growth is moderating but remains quite healthy in the upper end of the 2010-2019 range thus far. Lastly, all hail Tom Lee. Though he does tend to be a bit of a perma-bull, for good reason over time, his comments yesterday were timely as he noted a positive setup with stocks near all-time highs, VIX and rates falling, plenty of cash on the sidelines and cautious investors. Bottom line, he sees upside for stocks in May. Today, he’s off to a good start.

Heading into the final hour, US equities hovered near all-time highs. Breadth had expanded to almost 2.4:1, still favoring advancers, and little had changed in the sector performance. Technology (XLK, +2.2%), Real Estate (XLRE, +1.73%) and Utilities (XLU, +1.5%) still led gainers. Consumer Discretionary (XLY) and Materials were higher but lagged. Small caps continued to underperform slightly, with IWM +1.2% versus SPY +1.26% and QQQ +1.56%. Consistent with Technology leading the sector gainers and Materials bring up the rear, growth was outperforming value though both enjoyed gains. The Russell 1000 Growth gained 1.41% versus its Value counterpart +0.5%. While today’s data clearly soothed the nerves of some investors, the higher-for-longer Fed mantra still seems to be the primary talking point so maybe expectations can be held in check. Time will tell.

• April Retail Sales M/M was flat at 0% below consensus for a +0.4% rise and retail sales ex-autos +0.2%, in-line with consensus and down from March +0.9% (prev +1.1%); April gasoline sales +3.1% vs March +2.1%, April cars/parts sales -0.8% vs March -0.3%, Retail Sales Ex-autos/gas/building materials/food services -0.3% (est. +0.1%) vs March +1.0%.
• March inventory/sales ratio 1.37 months’ worth vs Feb 1.37 months; U.S. March business sales -0.1% vs Feb +1.4% (prev +1.6%); U.S. March retail inventories ex-autos revised to -0.2% (prev -0.1%).
• May NAHB Housing market index 45 (consensus 51) versus 51 in April (previous 51); May index of current single-family home sales 51 versus 57 in April (previous 57); May index of home sales over next six months 51 versus 60 in April (previous 60); May index of prospective buyers 30 versus revised 34 in April (previous 35).
• Mortgage Bankers Association (MBA) said in weekly update that the applications index rose 0.5% to 198.1 for the week ending May 10 from a week before, purchase index — which measures mortgage applications for the purchase of a home — fell 1.7% from a week prior and the refinance index rose 4.7% as the 30-year mortgage rate fell 10 basis points to the lowest level since early April.

• June WTI crude futures experienced another rollercoaster beginning today. After overnight gains faded into losses prior to the economic data releases this morning, oil did a pop and drop on the combination of more dovish CPI but softer retail sales figures. Bulls then enjoyed a rally prompted by EIA data showing a bigger draw of 2.508M vs expectations for a draw of just 0.6M. Later headlines from Netanyahu on the Rafah operation perhaps running for weeks, also provided support and futures rose through the afternoon to settle +$0.61/bbl, or +0.78%, to $78.63. Brent crude similarly gains $0.37/bbl, or +0.45%, to finish at $82.75.

• In Food & Beverages: Bernstein upgraded CPB (tgt to $46 from $42) and GIS (tgt to $70 from $62) to Market Perform from Underperform at Bernstein based on an expected second half improvement in volume growth, and recent stock underperformance which has led to 20+ year low valuations for both companies.
• In Restaurants: CAKE named best idea in restaurants at Stephens, replacing PTLO and raise tgt to $50 from $44 saying foot traffic trends have been stronger than the broader full-service industry since 2023. EAT removed from Raymond James analyst favorites list.
• In Consumer Products: KVUE shares dipped as JNJ exited its remaining stake in company, selling ~182.3Mm shares in an offering priced at $20 as part of debt-for-equity exchange; J&J spun off Kenvue a year ago in IPO priced at $22.

• In Autos: Chinese EVs (NIO, XPEV, LI) saw early weakness on further China tariff headlines out of the White House; NIO was upgraded from Underweight to Neutral at JP Morgan with $5.40 tgt noting Chinese government stimulus policy to boost auto demand including NEV which NIO should also benefit from and NIO’s latest battery as a service (BaaS) has successfully boosted store traffic and BaaS take rate (to 60-70% from previous 20-30%) and driven its sales momentum.

• In Aerospace & Defense: BA shares slipped after the Justice Department says Boeing breached 2021 agreement that shielded it from criminal charges over 737 Max crashes.
• In Solar: NXT reported strong 4Q results ahead of expectations and introduced 2025 guidance as benefited from continuing strong demand, NXT’s discipline around pricing and costs, and a favorable sales mix, which skewed more heavily toward the U.S.; SPWR shares tumbled after Wolfe downgraded shares to Underperform from Peer Perform noting the co is currently undergoing a CEO search which adds additional uncertainty around the strategic outlook.
• In Metals: In steel sector, BMO noted spot HRC index prices declined 3.6% over the past two weeks to $805/st, driven by limited spot activity, buyers continuing to purchase only on an as-needed basis, and some mills offering larger tonnage deals through contract mechanism at meaningful discounts. In Copper, miners rose initially (FCX, SCCO, BHP, RIO), tracking prices of metal which hit a two-year high.

• In FinTech/Payments: NU Q1 revenue $2.7B vs. est. $2.49B; added 5.5M customers in Q1, reaching total of 99.3M globally by March 31, compared to 59.6M only two years ago; delivered accelerating KPIs that included a sharp increase in Active Customers up 27% (+27% last quarter), accelerated ARPAC up 30% to $11.40 (+23% last quarter to $10.60), revenues up 69% (66% last quarter) and sharply expanding net margins (16.2% vs 11.3% in Q123).
• In Banks/Financial Services: DLO shares fell on earnings as Susquehanna noted despite very strong TPV growth up nearly 50% (up 4% Q/Q) and solid revenue up 34%, a 31% decline in revenue from Argentina due largely to devaluation weighed on results. Consequently, DLO fell short on the "rule of 100," landing closer to 60% (EBITDA/gross profit + gross profit growth). JHG was upgraded from Hold to Buy at TD Cowen and raised tgt to $37 from $34 and raise ests. NYCB agreed to sell about $5 billion in mortgage warehouse loans to JPMorgan.

• ASND announced that the FDA extended the PDUFA target action date for Yorvipath for the treatment of hypoparathyroidism by 3 months, from May 14, 2014 (previously expected today) to August 14, 2024, but Citigroup said approval remains highly likely.
• NVO has been testing its blockbuster GLP-1 drugs Ozempic and Wegovy in all sorts of indications: heart failure, Alzheimer’s, metabolic dysfunction-associated liver disease, and now — alcohol-related liver disease. What’s notable is that in a new Phase 2 trial testing combinations of Wegovy with other drugs in this disease, Novo will be studying alcohol intake as a secondary outcome. (The primary outcome is any change in liver scarring, or fibrosis.) – STAT News.

• In Health Services: GDRX announced a new direct contracting agreement for 2,200 Kroger pharmacy locations, renewing its existing relationship. Per the release, starting 6/1/24 patients can receive almost 50% more savings on the expected patient price for most generics vs. previously available prices.

• In IT Services & Consulting: ACN downgraded from Buy to Hold at Deutsche Bank and cut tgt to $295 from $409 saying after organic revenues contracted an estimated -2.5% cc in Q224, firm believes ACN has gone from a share gainer for most of its history to now losing market share to its peers in an IT Services industry under pressure.
• In PC Hardware/Data Centers: DELL price tgt was raised to $152 from $128 at Morgan Stanley saying supply chain and VAR/CIO checks show DELL gaining momentum in enterprise infrastructure, including competitive AI server wins and inflecting storage strength.
• In Software: MNDY shares jumped on results/guidance; Q1 revs rose 34% y/y to $216.9M vs. est. $210.5M and guided Q2 revenue $226M-$230M above consensus $225.1M, with Q2 operating income $17M-$21M and Q2 free cash flow $47M-$51M. SGH announced that CFO/SVP Ken Rizvi will depart the company as of June 30, 2024, to pursue another opportunity (as CFO of SYNA). On an interim basis, COO Jack Pacheco will assume CFO responsibilities until a permanent successor is identified.

• In Analog Semis: Cantor said investor interest in the Analog sector is on the rise with a clear vision to a trough in fundamentals in 1HCY24. Continues to recommend NXPI (raising price target to $325 for upside of ~20%+) as Analog favorite, but also recognize incrementally more upside for both ADI (raising price target to $240 for upside of ~15%) and TXN (raising price target to $210 for upside of ~10%+) as the cyclical rule of thumb — a trough is a trough is a trough — should never be forgotten – says Analog cyclical bottom a done deal for 1H24.
• In earnings: INFN reported its preliminary 1Q financial results below expectations with the sharper-than-expected revenue decline related partially to delayed release in book-to-ship orders creating an impact of $25mn, coupled with order push outs into the second half of the year.