Mid-Morning Look

Wednesday, July 13, 2022

Stock markets slide, erasing overnight gains after June CPI inflation data came in much higher than expected, rising above 9% Y/Y back at 40-year highs, raising fears of a more aggressive Fed rate hike cycle, slower consumer spending and a recession. The consumer price index (CPI) rose 9.1% on a year-over-year basis in June, coming in even higher than May’s 8.6% reading, which was the biggest increase since 1981 (and above estimates of +8.8%). Core CPI, which excludes food and energy prices, came in at 5.9% and above the 5.7% estimate. Following the upside inflation figures, US rate futures are now pricing in 22% chance of 100bps hike in July meeting, and 79% of 75bps hike. Note the Bank of Canada surprised with a full 100-bps point increase to its policy rate (to 2.5% from 1.5%) citing “higher and more persistent” inflation and the increased risk of those price gains becoming entrenched. Commodity prices tumble initially after the dollar index (DXY) spikes to 20-year highs post the data, and the euro trades to parity vs. the dollar at 1.00 at 20-year lows. No real lift for US stocks after the data, with the yield curve inverted by 17bps between the 2s-and 10’s (3.14% vs. 2.97% for 10-yr). Financials, Industrials, Materials and Technology among the hardest hit names (all most leveraged to recession).

Economic Data

·     June Consumer Price Index (CPI) data “hotter” than expected, rising +1.3% M/M vs. +1.1% est. and jumped to +9.1% Y/Y (highest since late 1981) vs. 8.8% est. The core reading, ex: food & energy, rose +0.7% vs. est. +0.6% M/M and rose +5.9% Y/Y above the expected +5.7%. June CPI energy +7.5%, gasoline +11.2%, new vehicles +0.7%.

Sector Movers Today

·     Casinos, Gaming, Lodging & Leisure sector; recession fears impacting the sector today after 40-yr high CPI data; CZR, HAS, SEAS, VSTO, YETI all downgraded to Sector Weight from Overweight at KeyBanc and cut tgts on BC to $85 (from $100); BYD to $70 (from $78); CHDN to $280 (from $300); FUN to $55 (from $65); MBUU to $70 (from $80); MTN to $300 (from $330); ONEW to $40 (from $55); PATK to $65 (from $90); RRR to $45 (from $60); SIX to $30 (from $45) – We started 2022 off with the fewest number of top picks/long ideas in recent memory, and now that list gets even shorter; Deutsche bank lowered tgts on BYD, GDEN, RRR and lower 2H22 and 2023 forecasts; lodging, travel, theme parks, casinos, cruise lines all feeling the impact

·     Metals & Materials; FCX downgraded to Neutral, SCCO to Sell, FQVLF to sell at Citigroup and lower tgts on the copper producers saying they will likely struggle against falling copper prices; gold miners fall (NEM, AEM, AUY, GOLD) as precious metals prices fall to 1-year lows, no longer benefiting as a hedge against inflation, as rising rates and a stronger dollar weigh; China’s iron ore imports in June fell modestly from a year earlier, as the world’s top iron ore consumer imported 88.97 million tonnes of iron ore last month, easing 0.5% from 89.42 million tonnes in June 2021; China, the world’s largest rare earth exporter, sold 4,265.3 tonnes of rare earths in June, down 12.3 % from May

·     Retailers; broad weakness early in discretionary stocks on slower spending fears given the increasing CPI report and rising recession fears; GPS downgraded to Hold from Buy at Deutsche Bank and cut tgt to $9 from $12 as sees low visibility around a sales recovery at Gap’s largest brand Old Navy and said the elevated promo environment is likely to have an outsized negative impact on Old Navy and Gap; VSCO announced a new corporate leadership structure focused on streamlining the business and better positioning the company moving forward; SFIX rises after filing last night showed 1M share purchase by company Director

·     Bank movers: the economy-sensitive U.S. bank stocks pressured on hotter-than-expected inflation data, offsetting the benefit of rising yields ahead of earnings season kick off tomorrow with JPM and Friday with BK, BLK, C, PGR, PNC, STT, USB, and WFC; although bank profits are typically boosted by rising rates, they are also very sensitive to economic fluctuations with concerns about bad loans or slowing loan growth in a recession

Stock GAINERS

·     APEN +13%; said the FDA had granted De Novo marketing authorization for several of its new endoscopic systems to be used in weight loss procedures for patients with obesity

·     CTRA +1%; among leaders in energy sector which is outperforming

·     IS +50%; to be acquired by Unity Software (U) in an all-stock deal, where each ordinary share of ironSource will be exchanged for 0.1089 shares of Unity common stock valued at about $4.4B https://bit.ly/3o1cOaK

·     KR +1%; as defensive stocks/staples outperform with stocks falling – also note the grocer launched Boost membership for customers nationwide today as well

·     SFIX +14%; following filing last night showed 1M share purchase by company Director

·     TAP +1%; another defensive name moving higher; caught an upgrade at Redburn

·     TWTR +6%; sued billionaire Elon Musk over his abandoned $44 billion takeover bid

Stock LAGGARDS

·     ATRA -55%; announces completion of the ATA188 Phase 2 EMBOLD study interim analysis in patients with progressive MS – based on the analysis there was not a sufficient dataset to draw conclusions about the predictive value of six months EDSS (downgraded at Stifel, JPM)

·     DAL -7%; reported Q2 adj EPS $1.44 vs. est. $1.64 on slightly better revs as Q2 cost per available seat mile of $20.89 vs $14.51 in Q2 2019, but sees September quarter capacity down 15%-17% vs September 2019

·     FAST -4%; reports Q2 sales of $1.78B, slightly below ests of $1.79B with in-line quarterly profit saying it took actions over the past 12 months to mitigate the impact of inflation on its products

·     FCX -2%; downgraded to Neutral, SCCO to Sell, FQVLF to sell at Citigroup and lower tgts on the copper producers saying they will likely struggle against falling copper prices

·     HGEN -75%; said that its COVID-19 drug trial didn’t achieve statistical significance on the primary endpoint; downgraded to neutral at Cantor and at HC Wainwright

·     PLRX -2%; 10.81M share Secondary priced at $18.50

·     TXMD -43%; after the company said that Athene Merger Inc., an affiliate of EW Healthcare Partners, didn’t buy the majority required shares by the extended offer deadline

·     U -13%; agreed to acquire IS in an all-stock deal, where each ordinary share of ironSource will be exchanged for 0.1089 shares of Unity common stock valued at about $4.4B (also announces $2.5B stock buyback while lowered its year sales outlook)