Closing Recap

Tuesday, September 13, 2022

Equity Market Recap

·     It was a brutal day on Wall Street, as inflation data showed no signs of slowing down, pushing major averages down over 4%! All 30 Dow components finished in negative territory, all eleven S&P sectors dropped 2% or more, as prices of everyday items that people use the most (food, housing, travel) saw a notable uptick in August, raising concerns about its impact on future consumer spending. Any doubt that Fed will raise rates by 75 basis points next week has effectively vanished after the “hotter” August CPI report, with some economists calling for a possible 100-bps hike at next week’s meeting. The Fed remains in an unenviable position or having to further raise rates aggressively while economic data points have shown signs of slowing. With today’s market roll, the S&P 500 dropped firmly back below its 50-day moving average of 4,040 and its 100-day MA of roughly 4,020 (which they had cleared over the last few days) and the Nasdaq 100 below its 100-day moving average around 303.50. Bespoke Investment noted the 4% drop for the Nasdaq marked the 7th one-day drop of 4%+ already this year, after seeing none in 2021 and 10 in 2020. We saw just 3 combined from 2012 through 2019. Any risk asset was slammed today, giving back much of the recent 4-day win streak, led by growth sectors (tech, discretionary). Bitcoin tumbled 9%, Treasury yields spiked (2-yr to 14-yr highs), the dollar rebounds after easing the last few days. The market was certainly caught off guard by today’s inflation report and now await the Fed policy meeting next week. Meanwhile, the Biden administration held talks with freight-rail companies and unions to avert more than 100,000 railroad workers walking off the job if contracts weren’t agreed upon by the end of the week. The strike could create havoc for an already fragile economy. Most of the railroad unions involved in contract disputes have reached/came close to agreements, while two unions totaling more than 100,000 workers are prepared to strike on Friday if contracts aren’t signed.

Economic Data:

·     August consumer price index (CPI) month-over-month was up an unexpected +0.1% vs. est. (-0.1%) and unchanged prior print, while CPI Year-over-year rises +8.3% vs. 8.1% estimate and vs 8.5% last month (was +9.1% in June, highest in 40-yrs). The Core CPI reading (ex food & energy) month-over-month rose +0.6%, more than double the +0.3% estimate and prior read of 0.3% and core year-over-year rose +6.3% vs. estimate +6.1% and +5.9% in July.

·     Shelter component of CPI is roughly 1/3 of the CPI index as per CNBC’s Liesmann – the shelter component this reading was up +0.7%. Shelter inflation just hit 6.24% Y/Y, surpassing the previous high from Aug 1990 of 6.1%. The food index continued to rise, increasing 0.8% over the month as the food at home index rose 0.7%. The energy index fell 5.0% over the month as the gasoline index declined, but the electricity and natural gas indexes increased. Air fares in the U.S. were up 34.4% in August compared to a year ago.

·     Goldman Sachs economist said after the CPI data today: “We now expect a 75bp hike in September followed by 50bp hikes in November and December, which would take the funds rate to 4-4.25% by the end of the year." Meanwhile, Nomura economist was the first calling for a 100-bps rate hike by the Fed next week.

·     Price increases over last year (CPI report). Fuel Oil: +68.8%, Gas Utilities: +33.0%, Gasoline: +25.6%, Electricity: +15.8%, Food at home: +13.5%, Transportation: +11.3%, New Cars: +10.1%, Overall CPI: +8.3%, Food away from home: 8.0%, Used Cars: +7.8%, Shelter: +6.2%, Medical Care: +5.6%, as per Charlie Bilello data

Commodities

·     Oil prices bounced off lows, but still finished lower with WTI crude down -$0.47 or 0.54% to settle at $87.31 per barrel & Brent crude futures settle at $93.17/bbl, down 83 cents, 0.88%. Oil prices reversed lower following the broad selling pressure in risk assets. U.S. may begin refilling the strategic petroleum reserve when crude prices fall below $80 a barrel, Bloomberg reported

·     Gold prices tumbled following the spike in the dollar and Treasury yields, down -$23.20 or 1.3% to settle at $1,717.40 an ounce. Natural gas prices in the US finish the day 0.4% higher at $8.284/MMBtu despite a broader move toward risk aversion as inflation fears caused brisk selling of U.S. equities and crude oil.

Currencies & Treasuries

·     The yield on the two-year Treasury note rose over 20-bps to 3.775%, its highest level since at least late 2007 (yield curve inversion steepens back over 35-bps vs. 10-yr) – recall a year ago the yield on the 2-yr was 0.21%! In a Treasury auction, the US sold $18B in 30-year notes at a yield of 3.511%, with the bid-to-cover ratio 2.42, primary dealers take 10.85%, directs 17.06% and indirect 72.09%. Bitcoin slumps 9% after inflation report causes investors to flee risky assets, back near $20K. The US dollar index (DXY) rises 1.356% to 109.80 (off morning lows 107.67).

Sector News Breakdown

Consumer

·     Retailers; higher CPI inflation reading hit the discretionary sector among the hardest with fears of pared back spending by consumers; RENT shares tumble following deterioration in Active Customer trends in the quarter (QoQ active sub growth slowed to -8% in 2Q vs Street +7%, decelerating from +17% in 1Q), while ending active subscribers 124.1k vs consensus 144.3k and guides Q3 revenue $72M-$74M vs consensus $79.9M (after beating on top/bottom line for Q2) – downgraded at Credit Suisse; SHOO downgraded to Hold from Buy, price target $30 from $40 at Loop Capital, increasingly cautious in Q4 and beyond given the slower sales pace the company has experienced since June and persistent inflation; PTON announced the national expansion of its rental program, offering future Members the opportunity to enjoy Peloton’s signature experience with just one low monthly cost and no long-term commitment

·     Auto sector; APTV agreed to acquire an 85% equity stake in Intercable Automotive Solutions, a subsidiary of Intercable, for EU595M; XPEV named a Buy catalyst call at Deutsche Bank; SEV initiated Neutral and $4 tgt at Wedbush noting Sono Group develops and manufactures solar technology to power electric vehicles while creating its own in-house solar EVs

·     Consumer Staples & Restaurants: OTLY downgraded to Neutral from Outperform at Credit Suisse ahead of what they expect to be a particularly volatile consumer environment in Europe and Asia. Inflation and unpredictable lockdowns have already hurt Oatly’s ability to compete against peers with more capacity; PFGC still sees FY adj EBITDA $1.15b to $1.25b, est. $1.2b still sees FY net sales $56B to $58B, est. $57.25b still sees 1q adj EBITDA $280M to $300M, est. $294M still sees 1q net sales $14.2b to $14.5b, est. $14.41b performance reaffirms fiscal 2023 outlook; TSN downgrade from Buy to Hold at Argus as expect inflation and a strong dollar to be headwinds for Tyson; casual dining names hit on fear higher prices will pare back consumer spending

·     Casinos, Gaming, Lodging & Leisure sector; in casinos (WYNN, LVS, MLCO), Bernstein noted Macau Weekly: GGR +6% w/w and -88% vs. ’19, Mid-Autumn Festival was weak. Est. Sept GGR -87% vs. ’19 amid strict China travel policies; shares of theme parks, online travel, lodging, and leisure names also whacked on the CPI report on slowing spending fears.

Energy

·     Energy stock movers: energy stocks faded after early strength in an overall gloomy day for U.S. markets; OPECC left 2022, 2023 world oil demand growth forecasts unchanged according to its monthly report and leaves 2022, 2023 global economic growth forecasts unchanged, cites potential for upside risks such as EU, China fiscal measures. OPEC said its oil output rose by 618,000 bpd in August to 29.65 million bpd led by Libya, Saudi increases.

·     MLPS & Pipelines: LNG announced its revised capital allocation plan and increased its FY22 adjusted EBITDA guidance by $1.2 billion to $11.0 – 11.5 billion – share repurchase program was quadrupled to $4 billion over the next three years and the dividend was raised by 20% to $1.58/share with a commitment to grow it by 10% annually through the construction of Stage III; CEQP 11.4M share Secondary priced at $26.90; AM to acquire Marcellus Shale gas gathering and compression assets from CEQP for $205M in cash, subject to customary adjustments

Financials

·     Bank movers: asset managers among top decliners in the S&P (BEN, TROW, BLK) following weaker monthly AUM data and market weakness – meanwhile the WSJ reported deposits at U.S. banks fell by a record $370 billion in the second quarter, the first decline since 2018; WFC CFO says loan growth has moderated in Q3, has seen deposit decline in Q3; HOOD Aug operating metrics show weakness as assets under custody at end of August were $71.0 bln, down 5% from end of July 2022 while notional trading volumes were mostly up in August from July 2022; JPM said it sees Q3 investment banking fees down 45%-50% y/y, sees Q3 trading revenue up 5% y/y

·     Asset Managers: monthly assets under management (AUM) data reported: AB preliminary assets under management decreased to $667 billion during August 2022 from $689 billion at the end of July. Firm-wide net inflows in August were outweighed by market depreciation, resulting in a 3% AUM decrease; IVZ preliminary month-end assets under management (AUM) of $1,416.0 billion, a decrease of 2.3% versus previous month-end as experienced net long-term inflows of $2.7 billion in the month; VRTS preliminary assets under management of $157.8 billion as of August 31, 2022; APAM preliminary assets under management as of August 31, 2022, totaled $132.7 billion; LAZ preliminary assets under management as of August 31, 2022 totaled about $217.0 bln

Healthcare

·     Pharma movers; AKRO shares surged after reporting positive study results for its lead product candidate efruxifermin in the chronic liver condition nonalcoholic steatohepatitis, commonly known as NASH – as achieved statistical significance on primary and secondary histology endpoints; AKUS said it received FDA approval for its investigational new drug application to initiate a Phase 1/2 first in human, pediatric clinical trial of AK-OTOF, a gene therapy intended for the treatment of patients with otoferlin gene-mediated hearing loss; RUBY said restructuring and cost-saving measures will extend its cash runway until end of 2023

·     Biotech movers: the broader biotech space better for sale today, underperforms broader market; several stock offerings as CDAK 13.33M share Spot Secondary priced at $1.50; RVNC 8M share Spot Secondary priced at $25.00; RLAY 11.3M share offering priced at $26.50, 8% discount to last sale; SRPT announces a $1B proposed convert offering

·     MedTech Equipment & Healthcare Services; CVS backed its previous forecasts for adjusted earnings per share and cash flow from operations for 2022, raised adjusted EPS guidance to $8.40-$8.60, from prior $8.20-$8.40 and said it expects to cash flow from operations for the year to be $12.5B-$13.5B; CAH reaffirmed FY23 guidance of $5.05-$5.40 range (est. $5.30) saying medical segment loss guidance change primarily reflects impact of ongoing simplification efforts; HCAT downgraded from Overweight to Neutral at Piper and cut tgt to $11 from $21 as believe the company’s enterprise DOS infrastructure may require an overhaul

Industrials & Materials

·     Transports: the Biden administration held talks with freight-rail companies and unions to avert more than 100,000 railroad workers walking off the job if contracts weren’t agreed upon by the end of the week, according to reports. In a transport preview at Deutsche Bank, the company said they remain bullish on the rails, despite the potential for a large-scale labor strike this week as ests is most ahead for NSC (+7% beat), followed by CNI (+5%) and UNP (+1%) into earnings. Said they are 5% below the street for SAIA, 3% below for WERN and 1% below for ODFL .  

·     Metals: in the steel sector, Citigroup updated estimates ahead of mid-quarter steel guides (NUE, CMC, X, RS, STLD) – as they are below consensus, but this represents lags and the buyside is already there. Said results will likely be sequentially weaker given the fall in sheet prices in US and EU but still very strong. Long products, fabrication and annual contracts would act as cushions. Demand commentary should remain mostly constructive.

·     Chemicals: DOW downgraded to Hold at Jefferies saying the current macro conditions suggest olefin prices will remain under pressure into next summer, and believe this model could prove too optimistic given new capacity additions; EMN guides sees 3q adj EPS about $2.00, below prior guidance of $2.46 and below the consensus estimate of $2.60 saying demand has slowed more than expected in August & September; ag chemical names NTR, MOS, CF rebound after underperformance on Monday – one of few names higher today

·     Materials: in the beverage can industry, Wells Fargo lowered estimates and tgts for AMBP, BALL, CCK as see the risk of downward earnings revisions over the medium-term given potential for reduced industry utilization being paired with new market entrants and select customers forging new partnerships

Technology, Media & Telecom

·     Media, Internet; Disclosures from a former TWTR executive turned whistleblower show that at least one Chinese agent is working at the company, Senator Chuck Grassley said in his opening remarks during a Senate hearing on Tuesday featuring testimony from the whistleblower; META approaching June lows around $154, top decliner in the S&P below the $157 level as high growth stocks hit the hardest today (ETSY, AMD, NVDA)

·     Semiconductors: INTC drops to $30 level – lowest levels since 2016 as semiconductors were lower across the board; Vedanta Ltd and Taiwan’s Foxconn will invest $19.5 billion under pacts signed on Tuesday to set up semiconductor and display production plants in Gujarat, the home state of Indian Prime Minister Narendra Modi 

·     Software movers: ORCL Q1 total revenue +23% y/y cc vs. +20-22% guidance and $1.03 non-GAAP EPS in line with FX-adjusted guidance, with strength led by organic Cloud acceleration to +29% y/y cc (vs. 25-28% guide) from +22% last quarter; ADBE receives its second downgrade in as many days ahead of earnings, with BMO Capital cutting from Outperform to Market Perform saying they envision the upcoming quarter to be a neutral event for the stock (was downgraded by Mizuho yesterday); APP withdrew its bid for Unity (U) and said it will not submit a revised proposal to combine roughly a month after making a proposal; BRZE shares fell on results