Closing Recap

Friday, September 02, 2022

Equity Market Recap

·     Volumes were thin and headlines sparse following the morning August payroll report that was well received initially – but not enough to turn the recent market tide as stocks finished lower for a 3^rd straight week. S&P futures hit a morning high just above 4,019 post jobs data, but failed, again, just below its 50-day moving average resistance (around 4,022), extending declines throughout the day. Amid a lack of stock related stories coupled with light volume ahead of the 3-day holiday weekend, markets reversed as investors again “sold the rip” with little resistance as there remains considerable uncertainty over the FOMC’s rate trajectory this month, and into next year to keep investors anxious. The market tumble began a little after 12:00 PM ET, coinciding with headlines that Gazprom announced Nord Stream 1 pipeline will remain shut after technical issues. The pipeline, closed reportedly for maintenance, was expected to reopen Saturday. The headlines are seen as a blow to Europe as the standoff with Russia continues. Recession fears in Europe weighing on investor minds, especially dealing with soaring natural gas prices amid supply disruptions, along with recession fears here in the U.S. The Dow ended lower after rising as much as 370 points. For the week, broad declines as the S&P 500 fell about -3.2%, the Dow -3%, the Nasdaq -4.2% (led by a -7.3% drop in semiconductors) and the Smallcap Russell 2000 fell -4.9% – the Nasdaq extended its losing streak to 6-days (longest since Summer ‘19 7/29-8/5).

Economic Data:

·     August Nonfarm Payrolls reported at 315K vs. est. 300K, while Private payrolls were 308K vs. est. 300K and manufacturing payrolls 22K vs. est. 20K. The unemployment rate rises to 3.7% vs. est. 3.5% and average hourly wages rise +0.3% vs. est. for +0.4% increase. The labor force participation rate, adults working or seeking a job, rose to 62.4% in August from 62.1% in July.

·     The change in total nonfarm payroll employment for June was revised down by 105,000, to +293,000, and the change for July was revised down by 2,000, to +526,000. With these revisions, employment in June and July combined is 107,000 lower than previously reported.

·     After hitting a 53-year low in July (3.5%), the US Unemployment Rate moved up 0.2% to 3.7% in August, its largest move higher since April 2020

·     July factory orders fell (-1.0%) vs. est. +0.2% and vs June +1.8%; July factory orders ex-transportation fell (-1.1%) vs June +1.0% and factory orders ex-defense -0.5% vs June +1.1%; U.S. July inventories/shipments ratio 1.47 months’ worth vs June 1.46 months

Commodities

·     Oil prices rise on Friday, up $0.26 or 0.3% to settle at $86.87, but off the earlier highs of $89.66 per barrel. Prices jumped early on expectations that OPEC+ will discuss output cuts at a meeting next week (9/5), though concern over China’s COVID-19 curbs and weakness in the global economy continued to limit gains. The weekly Baker Hughes (BKR) rig count fell -5 from last week to 760, with oil rigs down -9 to 596, gas rigs up 4 to 162 and miscellaneous rigs unchanged at 2. Gold prices rose $13.30 or 0.8% to settle at $1,722.60 an ounce, getting a boost as dollar strength eased, but still finished the week lower by about -1% (bounced off 6-week lows yesterday). Natural gas prices slide -5.1% to nearly three-week-low $8.786/MMBtu and ends 5.2% lower for the week, the largest one-week decline since July 1.

Currencies & Treasuries

·     After spiking initially post the jobs report, Treasury yields ended lower, as the two-year yield, which typically moves in step with interest rate expectations, was down -11 basis points at 3.41 after hitting 15-year highs the day before above 3.5%. The yield on the benchmark 10-year note fell -6 bps to 3.205% after hitting two-month intraday highs earlier. Rate hike expectations have been driving currency and Treasury markets, with a 75-bps hike forecasted by the Fed in Sept.

·     The U.S. dollar edged back from a 20-year high as traders digested the jobs report. The euro retraced some of the previous day’s losses against the dollar but remained below parity at 0.996. The dollar hit near 25-year highs of 140.801 against the Japanese yen before sliding back. The European Central Bank (ECB) is due to meet next week, with money markets betting on an unprecedented 75 basis points hike.

Sector News Breakdown

Consumer

·     Retailers: LULU reported Q2 sales growing 29% (vs. guidance 22-23%), driven by strong comp growth of +25%, and EPS of $2.20 handily beating guidance of $1.82-$1.87 and raised FY guidance by more than the Q2 beat (inventories at end of Q2 +85% to $1.5B); KSS popped after Reuters reported Oak Street offers to buy as much as $2B of property from Kohl’s; shares of OXM spent most of the day lower after earnings results and SPWH higher on its; TLYS downgraded from Buy to Neutral at Seaport Global after Q2 results fell short of TLYS’s range, albeit not by much, and, more importantly, now think that results will be bad as the valuation is suggesting (guides Q3 sales $165M-$170M, below estimates $172M)

·     Auto sector; US light vehicle sales in August totaled 1.13 million units or a SAAR of 13.2 million, flat with each of the last four months, and down a fraction from last year adjusted for an extra selling day; FREY files $500M mixed securities shelf; TSLA’s China-made vehicle sales to hit 77K units in August, says CPCA official; Ford (F) said total vehicle U.S. sales 158,088 in august 2022, up 27.3% y/y, but were off about -4% from the prior month with U.S. electric vehicles 5,897

·     Consumer Staples & Restaurants; SBUX announced that Laxman Narasimhan will become the company’s next chief executive officer and a member of the Starbucks board of directors; CVGW shares tumble on earnings results as Q3 adj EPS $0.16 missed est. $0.35 and said saw volatility that negatively affected results in Q3 in Aug

Energy, Industrials and Materials

·     Transports, Industrial & Machinery; HOLI rises after Reuters reported a consortium led by China’s Hollysys Automation Technologies management plans to take the co private in a deal that would value the firm at $1.8 billion; for MMM, Bloomberg reported the co faces a lawsuit by a group of soldiers looking to block the industrial group from the planned spinoff of its healthcare business and paying dividends; industrials HON, DOW, MMM were among the largest decliners in the Dow Jones Industrial Average

·     Metals & Materials; JPMorgan downgraded ratings on DOW and LYB to neutral from overweight, saying the petrochemicals companies are probably not the best places to put new money to work as the direction of shorter-term commodity chemical prices and volumes is decidedly lower

Financials

·     Bank movers: financials were among the market leaders early following the “goldilocks” type jobs report earlier this morning, showing people returning to the workforce while job growth remained steady and slightly above economist estimates. Treasury yields popped on the release of data, lifting banks, insurers across the board. In credit cards, the average credit card debt held by households in the United States surged by 13% in the second quarter, the largest increase in such debt since 1999, according to an Aug. 30 report from the Federal Reserve Bank of New York

·     Bitcoin, FinTech & Payments; Deutsche Bank that after hosting MA EVP, Blockchain and Digital Currencies at their conference, MA believes the underlying blockchain technology is here to stay and expects there to be a range of blockchain networks to exist and multiple use cases that will emerge across NFTs, investing, and DeFi, among others; Bitcoin leveraged players (SI, COIN, MSTR, MARA – miners, investors, banks etc.) rebounded with Bitcoin above the $20K level.

Healthcare

·     Biotech & Pharma movers; PFE and BNTX have filed proceedings at the High Court of England & Wales seeking judgment that their COVID-19 vaccine, based on mRNA technology, does not infringe on CVAC European patents, according to a regulatory filing; DNA shares slipped after BLI disclosed in a filing late Thursday that it will wind down its collaboration with DNA; AMLX shares tumbled after FDA AdCom BDs released for ALBRIOZA study

Technology, Media & Telecom

·     Semiconductors; AVGO reported in-line JulQ results and guided OctQ to $8.9B (ahead of consensus $8.7B), with adj. EBITDA at ~63% of revs and noted demand remains strong across all end markets as customers continue to invest in data center upgrade/refresh and broadband with the Wireless ramp at iPhone ahead; QCOM and META are teaming up to develop custom chipsets for virtual reality products; NVDA downgraded to neutral from outperform at Daiwa

·     Software movers; CRM and OKTA both upgraded to Neutral from Sell at Guggenheim following the recent declines in shares; SMAR Q2 results were better than expected, with billings returning to >40% growth (+44% vs. +36% in FQ1) and sustained subscription revenue growth >40% (+43%), but guidance was mixed; NCNO Q3 results that exceeded expectations, with an increased outlook for FY23 despite a challenging macro and increased FX headwinds (sees FY23 revenues $401.5M-$403.5M vs. est. $391.49M); HCP rises after reported Q2 revenue that beat expectations and raised its full-year forecast; PD posts Q2 rev beat $90.3M vs. est. $88M with in-line Q3 rev guidance of $92M-$94M vs. est. $93M