Mid-Morning Look

Friday, July 08, 2022

U.S. stocks decline on the open as a stronger jobs report for June reinforces view the Fed likely staying the course on interest rate hikes in upcoming meetings, with noted “hawks” Bullard and Waller yesterday each reiterating views for a 75-bps hike in July and another 50-bps in September. The unemployment rate stayed steady at 3.6% while wages grew 5.1% y/y and headline nonfarm and private payroll figures topped estimates handily. Stock news was relatively minimal overnight, although the assassination of former Japan PM Abe spooked sentiment while China’s PBOC withdrew liquidity, pouring cold water on the Thursday China stimulus excitement. The U.S. dollar index (DXY) rises +0.15% around 107.30 early before fading while Treasury yields jumped on the jobs reading with 10-yr at 3.04%. Gold prices extend losses early on the stronger buck. Earning season on deck for next week, with the big banks kicking things off next Thursday with JPMorgan results. Markets hope that weaker trading revs and investment banking will be offset by increased lending as margins improved with higher rates.

Economic Data

·     June jobs data: Nonfarm Payrolls reported at +372K above the +268K estimate and vs. May reading of 384K; U.S. June private sector jobs +381K above est. +240K, and May +336K and June factory jobs +29K above est. 18K; the unemployment rate unchanged and in-line at 3.6% as Labor force participation rate falls to 62.2% in June vs 62.3% in May. Average Hourly earnings M/M reported +0.3%, in-line with estimates and Y/Y rose +5.1% vs. est. 5% (prior month +5.3%)

Sector Movers Today

·     Industrial & Machinery; MRC positively pre-announced Q2 results and raised the FY guide on strong, broad based revenue and margins. MRC is one of the largest global distributors of pipe, valves, and fittings serving all key energy markets (Mizuho notes FLS, EMR are key customers); ITW was downgraded to Neutral from Buy at UBS and cut KMT to Sell from Neutral; Cowen upgraded TT to OP from MP calling it an attractive entry point for HVAC Bellwether and upgraded LII to Outperform as well saying shares oversold given C23 headwinds

·     Internet, Media, and telecom movers: TWTR slides after the Washington Post reported that Elon Musk’s $44 billion proposed takeover of the social media company was in serious jeopardy; in advertising, Wells Fargo upgraded shares of IPG, OMC to Overweight as think the business models are far more resilient than prior periods, have strong cash flows to support bigger buybacks, and have limited estimate risk, while bearish on Radio and see a tough period ahead, as downgrade IHRT, AUD and CCO; in Telecom, Wells maintained Overweight rating on TMUS, but are incrementally positive on T and cautious on VZ heading into Q2 earnings

·     Semiconductors; TSM reported net revenue of ~NT$175.87B (-5.3% M/M), and 18.5% Y/Y growth; revenue for January through June 2022 marked a 39.6% increase Y/Y; Exports to the United States were up 27.9%, much faster than a 15.5% jump recorded the previous month; Reuters reported the U.S. mulls fresh bid to restrict chipmaking tools for China’s SMIC; IMOS reported 2Q Revenue of NT$6.85 billion, down 1.9% y/y and 2Q revenue in USD $230M

·     MedTech Equipment; Agilent (A) was downgraded to Neutral at Citigroup in Life Science Tools & Diagnostics 2Q22 Preview where they say they prefer to own names whose end markets have evolved more towards biopharma as opposed to industrial/applied, citing TMO, DHR and WAT as preferred names for the prints; Citigroup noted that CMS released its proposed CY23 physician fee schedule, which they view as incrementally positive for the relevant stocks under coverage (IRTC, GKOS, SGHT); Truist also noted bullishness on IRTC following CMS’s $229 proposed ZioXT NCD rate which came in better than our assumption (~$210), and should help remove a reimbursement overhang; IQV named a catalyst call Buy idea at Deutsche Bank as expect to deliver 2Q EPS in line or above consensus expectations with positive forward looking comments

Stock GAINERS

·     IRTC +21%; after CMS released its proposed CY23 physician fee schedule, which Citigroup views as incrementally positive for the relevant stocks and Truist also noted bullishness as proposed ZioXT NCD rate which came in better than our assumption (~$210)

·     KRUS +20%; posts Q3 top/bottom-line beat and better sales view of $137M-$142M for year vs. est. $136M

·     LEVI +2%; Q2 adj EPS $0.29 vs. est. $0.23; Q2 revs $1.47B vs. est. $1.43B; reaffirms annual guidance for revenue and EPS; increases quarterly div by 20%

·     MRC +9%; positively pre-announced Q2 results and raised the FY guide on strong, broad based revenue and margin

·     TH +19%; raises 2022 financial outlook by 53% with a projected record $505 million annual revenue

·     TSLA +2%; achieved its highest monthly sales of China-made vehicles since opening its Shanghai plant in 2019, as the U.S. carmaker sold 78,906 China-made vehicles in June

·     XPO +2%; upgraded from Equal Weight to Overweight at Morgan Stanley with $75 tgt

Stock LAGGARDS

·     DKNG -2%; Wells Fargo noted for the 2Q22TD (April/May), FanDuel’s sports betting GGR share has meaningfully accelerated to ~45% vs. ~33% in the 1Q22 and 34% in the 4Q22

·     GME -5%; after the company terminated its CFO Michael Recupero, who will be replaced by Chief Accounting Officer Diana Saadeh-Jajeh

·     SIX -6%; Citigroup downgraded SIX to Neutral from Buy and cut tgt to $26 from $41 saying is beginning to see signs of weakness across the theme park industry (also cuts tgts on SEAS, FUN)

·     TECK -4%; said Q2 steelmaking coal sales were 6.3 mln tonnes, at lower end of previously announced guidance of 6.3 mln–6.7 mln tonnes

·     TWTR -4%; after the Washington Post reported that Elon Musk’s $44 billion proposed takeover of the social media company was in serious jeopardy

·     UPST -21%; after cuts Q2 revenue view to $228M from $295M-$305M, below consensus $297.68M and lowers Q2 net Income view to ($31M)-($27M) from prior ($4M)-$0M

·     WDFC -12% after guides FY net sales $519-532Mm vs est. $537.5Mm and EPS $5.02-5.10 vs est. $5.18 after posting Q3 EPS and sales miss