Closing Recap

Friday, October 04, 2024

U.S. stock markets applauded a stellar monthly jobs report, strong on almost every level, with big job gains for both nonfarm and private payrolls (topping views), unemployment rate fell to 4.1% and wages rose both m/m and y/y basis in what was as good as a report as one could have asked. Of course, several jobs’ reports were positive last year too before the downward of revisions by over -800K jobs just a few months ago! Anyway, the better report today helped alleviate any concerns about the economy and suggests no imminent recession which the stock market liked. Of course, the flip side of this is that with a stronger economy, and better jobs, why would the Fed need to get more aggressive on rate cuts going forward, especially after an outsized and unprecedented 50-bps rate cut (usually seen for when the bleakest of times) at the September meeting? One does wonder, especially with the Presidential Election now roughly one month away. With the late day push, major averages erased weekly losses with major averages getting back near all-time highs and the Smallcap Russell outperforming.

Traders are now pricing in less than quarter-point Fed cut in November. Odds that the Fed will cut by a total of 50 basis point this year rise to 73% from 44% yesterday, while odds of 75-bps in cuts fall to 25% from 45%, CME data show. Bets on a 50-bps trim in November are down to 9%, from 32% yesterday. A few banks lowered their outlook on rates after the strong jobs report with Bank America changing their November Fed call to 25 BPS from 50 BPS cut.

The other big story today was that overnight, dockworkers agreed to end a three-day strike that had halted trade on the US East and Gulf coasts, as The International Longshoremen’s Association and the US Maritime Association extended their previous contract through Jan. 15. Some 45,000 dockworkers at East and Gulf coast ports are returning to work after the agreement improved wages by 62% from about 50% over six years (but was below their 77% asking request). The ILA said they are going to have other talks about protecting them from automation over the next few months. The news a sigh of relief for supply chain in autos, retailers, food, medical supplies, etc. and eases inflation concerns.

Another busy week lies ahead. Few highlights to watch next week: Amazon (AMZN) holding its Prime days 10/8-10/9; Ad week in NY on 10/7-10/10 (watch TTD, ROKU, PUBM), Zoomtopia Conference 10/9-10/10; Tesla (TSLA) Robotaxi event on 10/10. There are also several Fed speakers and Fed minutes from September meeting Wednesday. N eco calendar, weekly jobless claims, consumer sentiment and the latest inflation readings with CPI/PPI inflation Thursday/Friday respectively. Earnings season also gets underway with PEP, DAL, DPZ reporting midweek before banks on Friday JPM, WFC, BK.

• In an interesting statistic, @bespokeinvest noted “From 1997 to the onset of Covid, there wasn’t a single month (out of 272) that the employment component of both ISM reports was below 50 and we had a 250K+ print in Non-Farm Payrolls. Since then, it’s happened 8 times (out of 55 months) and 3 of the last 10.”

• Gold prices took a pause on Friday, slipping -$11.40, or -0.43%, to settle at $2,667.80 an ounce, pressured by strength in the U.S. dollar following a stronger-than-expected September jobs report, but remains strong (Gold futures settled at a record-high $2,694.90 on Sept. 26, also touching an all-time intraday high of $2,708.70). Bitcoin prices hit its best levels late in the day rising +2.75% at $62,450.
• Strong jobs lift the dollar/Treasury yields. The U.S. dollar index (DXY) jumped to a 7-week high, rising +0.5% to 102.50 following strong U.S. jobs data, surging to 148.80 against the Japanese yen off weekly lows below 1.42, best since mid-August and its best weekly percentage gain against the Japanese currency since 2009 (up over 4.6%), the euro also fell to lowest levels since the middle of August, below the 1.10 level. The British Pound fell this week vs. the buck after BoE Chief Economist said the British central bank should gradually cut interest rates. Treasury 10-year yield rose 11.7bps to 3.967%, highest since early September while the Treasury 2-year yield climbs 19-basis points on day to 3.91%.

• In Chinese EVs: The European Union voted to impose tariffs as high as 45% on electric vehicles (BYDDF, NIO, LI, XPEV) from China. The European Commission, the bloc’s executive arm, can now proceed with implementing the duties, which would last for five years. Ten member states voted in favor of the measure, while Germany and others dissented.

• In Restaurants: DPZ removed from Wedbush best ideas list ahead of earnings report on Oct. 10 and cuts PT to $470 from $510 saying its market share gains could be limited in the second half of 2024 due to higher competition from value wars among burger chains; DIN was downgraded from Buy to Hold at Truist and slashed tgt to $37 from $66 as potentially severe Applebee’s comp store sales underperformance vs peers (based on Truist Card Data) shakes its confidence that improving comps will be a NT catalyst for the shares. JACK shares slip after CFO departure. Positive Truist comments on dining names citing Truist Card Data point to broadly improving sales growth for full-service restaurants (FSRs) in August and September (note DENN, CAKE, BJRI shares up on day).

• In Building Products: AZEK was downgraded to Hold from Buy at Loop Capital after its quarterly composite decking survey reported a more broad-based softening of demand across product categories in the near term. Survey respondents reported that composite decking sales increased 2-3% YoY on average at the contractor level in 3QCY24 which declined sequentially from LOOP’s 2QCY24 survey (+6-7%) as demand slowed in August.
• In Construction Supplies: APOG shares surged after better results and margins; Q2 adj EPS $1.44 vs. est. $1.23 and revs fell -3.2% y/y to $342.4M vs. est. $335.7M; guides adj. EPS $4.90-$5.20, above prior $4.65-$5.00 vs. consensus est. $4.71 and guides revenue -4% to -7%; Q2 adjusted operating margin improves by 110 bps to 12.6%

• In E&P Energy Sector: FANG upgraded to Outperform from Market Perform and raise PT to $215 from $205 at BMO Capital following completion of the Endeavor acquisition, as believes this positions FANG as a long-term winner with leading core inventory depth and best in class capital efficiency. Trican Well Service (TOLWF) downgraded to MP from Outperform amid slowing growth/valuation; Source Energy (SCEYF) downgraded to MP from Outperform following strong multi-year run; GPOR downgraded to In Line from Outperform at Evercore/ISI with price target of $170.
• In Refiners: PBF downgraded to Market Perform from Outperform and PT cut to $35 from $42 and reduce ests in refiners at BMO Capital noting as a higher cost refiner, BMO sees margins, earnings, and FCF being more pressured with peers, leaving less attractive valuation and capital return potential.
• In Integrated Oil names: XOM shares rallied to near all-time highs on spike in oil prices; meanwhile overnight, XOM said in an 8K filing last night that a -17% drop in oil prices hit Q3 upstream earnings by $600M-$1B; also indicated weaker refining margins during the quarter would also hurt profits by up to $1B.

• In Insurance: HIG was downgraded from Buy to Neutral at Bank America but raise tgt to $121 from $113 on valuation noting shares are up 47% year to date with its price-to-consensus 2025 EPS up from 7.1x to begin 2024 to 10.0x currently saying any additional upside is not enough to justify a Buy recommendation. CB was downgraded from Neutral to Underperform at Bank America also on valuation noting shares have outperformed the S&P 500 (up 21% YTD and 35% over past year) as part of a broader outperformance among P&C underwriters.
• In Banks: earnings season begins late next week with JPM, WFC, BK set to report Friday October 11^th; MTB upgraded from Peer Perform to Outperform at Wolfe saying expects MTB to continue to generate peer-leading NIMs through 2026. MS was upgraded from Hold to Buy w/ $118 PT at HSBC noting shares have underperformed GS and the market materially since 2021 and HSBC thinks the underperformance could be ending.
• In Data Center REITs: EQIX upgraded to Buy from Hold and PT to $1,000 from $865 and DLR raised to Hold from Reduce and PT to $160 from $124 in Data Centers at HSBC saying operational momentum for EQIX and DLR set to improve significantly in 2025: Data center demand has far outstripped supply YTD in 2024, due to strong AI-driven demand and constrained supply in major markets. Yet, both have underperformed the broad index on company-specific concerns.
• In Brokers & Exchanges: TW reports record September 2024 total trading volume of $56.1 trillion and record average daily volume of $2.63 trillion.

• In Medical Research/Diagnostics: EXAS said the FDA approved its stool DNA test called "Cologuard Plus" to screen for colorectal cancer; says the new test will minimize unnecessary follow-up colonoscopies by reducing the likelihood of a false-positive screening test.
• In Life Sciences: TMO said its Greenville, N.C. plant has been found in breach of US FDA regulations, including twice this year. The FDA’s most recent inspection of Thermo Fisher plant found shortfalls in manufacturing of Sanofi’s and AstraZeneca’s Beyfortus RSV treatment.

• In Airlines: SAVE shares tumbled after the WSJ reported the company has been in discussions with bondholders over the terms of a potential bankruptcy filing in the wake of its failed merger with JBLU. Spirit has been struggling with losses and declining revenue as it aims to address coming maturities within its $3.3B debt load, including more than $1.1B of secured bonds that are due in less than a year. https://tinyurl.com/yv3sxfvz . Other airlines seeing strength on the headlines as well UAL, AAL, DAL, SKYW, JBLU.
• In Railroads: CNI was downgraded from Buy to Neutral at Bank America and lowered its price tgt to $122 from $129 given below-est. Q3 volumes and sustained network performance challenges post its August Conductor/Engineer labor lockout.

• In Heavy-duty truck market (CMI, PCAR): OTR Global downgraded its view of the heavy-duty truck market to Negative from Mixed, citing checks saying global market conditions have deteriorated in the past 90 days for most dealers due to low freight prices in the United States, worsening economic conditions in Europe and unfavorable weather in Brazil.
• In Aerospace & Defense: WWD was downgraded to Hold from Buy at TD Cowen and cut tgt to $160 saying WWD faces a transition F25, with flat or down EPS given China OH headwinds and likely aero OE de-stocking — factors that limit the stock’s upward re-rating prospects.

• In Lithium sector: shares of ALB, ALTM advanced after the Australian media publication suggested RIO may be joining BHP in a big acquisition and some believe that a major deal in the lithium space may now not be too far away. https://tinyurl.com/bdedavt8; gold miners (GOLD, AEM, NEM) take a breather as gold prices ease on dollar spike.

• In Media: WMG was downgraded to Underperform from Neutral at Bank America and cut tgt to $30 from $33 saying the longer-term growth potential and visibility of the music labels may not be as significant and predictable as initially thought given the relative disappointment in emerging platforms across the industry (E.G. TikTok renewal and loss of Meta premium video), and volatility in ad-supported streaming.