Mid-Morning Look

Monday, October 02, 2023

U.S. stocks are mixed despite lawmakers averting a government shutdown this weekend, as another push higher for Treasury yields and the dollar plague interest rate sensitive sectors. Technology & Communications stocks (large caps like NVDA, AAPL, AMZN, GOOGL, META) are the only S&P sector gainers thus far (and remain the biggest winners of 2023 thus far), while Utilities and Energy stocks tumble the most. The 10-year yield pops to highs 4.66% and the dollar gains 0.5% to 106.75 (best since last November) on rising rate hike fears while gold/precious metals tumble further. Bitcoin is back in headlines with a more than 5% pop to best levels in 6-weeks above $28,300. A busy week of jobs data coming up with JOLTs tomorrow, ADP Wednesday, jobless claims Thursday and Nonfarm Payrolls Friday. This morning, ISM Manufacturing and Construction Spending came in better. Fed Chairman Powell and Philadelphia Fed President Patrick Hasker will speak at a roundtable this morning. Later in the day, Cleveland Fed President Loretta Mester will speak on the U.S. outlook. All three major stock indexes ended Q3 lower to log their first quarterly decline in 2023. Congress Saturday passed a stopgap funding bill with overwhelming Democratic support after Republican House Speaker Kevin McCarthy backed down from an earlier demand by his party’s hardliners for a partisan bill.

Economic Data

·     ISM U.S. manufacturing activity index for September 49.0 vs. consensus 47.7 and above the 47.6 in August as prices paid index 43.8 in September vs 48.4 in August, new orders index 49.2 in September vs 46.8 in August and employment index 51.2 in September vs 48.5 in August.

·     Construction spending for August rises +0.5% to $1.983 trln, in-line with consensus and compared to July +0.9% while Aug private construction spending +0.5%, public spending +0.6%.

·     S&P Global September final manufacturing PMI at 49.8 (vs flash 48.9).

Sector Movers Today

·     In Software: MSFT was added to Q4 2023 Tactical Ideas List with a $400 price target at Wells Fargo; at Goldman Sachs: NVDA, OKTA, CTAS, and QTRX all added to the Conviction List, and remove CRM and JCI TOST was downgraded to Neutral from Buy at Mizuho on reduced ests and nearly halve tgt to $16 from $30 noting GPV per location slowing faster than restaurant inflation, which could signal muted success in enterprise. Piper with a few ratings changes as DDOG upgraded to Overweight with a $115 price objective and upgraded ZS to Overweight and upped tgt to $190 as believes the co will continue to benefit from strong trends in security spending and network transformation momentum.

·     In Consumer Lending: KBW upgraded PFSI and COOP to Outperform from Market Perform given both companies are well-positioned to generate strong servicing earnings in a high interest rate environment, which is likely to keep prepayments near their current (very low) levels and believes that mortgage banking earnings have likely bottomed. BFH downgraded to Sell as Goldman Sachs which expects the stock to underperform given sustained larger than anticipated credit losses and uncertainty from late fees (lower 12m target to $32 from $44).

Stock GAINERS

·     COIN +5%; after obtained a major payment institution license from the Monetary Authority of Singapore, which would enable the Co to expand its digital-payment token services to individuals and institutions in the city state.

·     DFS +7%; a top gainer in the S&P after the co disclosed its much-anticipated consent order with the FDIC late Friday, and the company faces no fines or other growth-constraining penalties.

·     HOLI +4%; said it forms special board committee to conduct a formal sale process.

·     NVDA +2%; added to Goldman Sachs Conviction List, citing focus on its status as the accelerated computing industry standard for the foreseeable future given its competitive moat and the urgency with which customers are developing and deploying increasingly complex AI models.

·     PODD +4%; was upgraded to Buy from Hold at Jefferies in insulin sector saying only sees the potential for GLP-1 weight-loss drugs to have “a modest drag or no drag” on the insulin-pump opportunity.

Stock LAGGARDS

·     ARCH -15%; lowered its FY23 coking coal sales volumes to be between 8.6-8.9 mln tons, compared with previous outlook of 8.9-9.7 mln tons and sees 2023 average metallurgical cash cost to rise between $88-$91 per ton vs. $79-$89 per ton earlier AMR, ARLP, BTU, CEIX weak).

·     DHR -4%; after completing the separation of Veralto (VLTO), its water quality business.

·     NEE -7%; among top decliners in broad utility weakness on higher rates/yields (AES, CEG, PCG, NI among big declines in the sector).

·     NEM -3%; as gold miners extend losses tracking gold prices lower as the surge in the dollar and Treasury yields plaguing the precious metal.

·     SDC -55%; voluntarily filed for Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of Texas as it plans to implement a comprehensive recapitalization transaction.

·     SEDG -3%; downgraded to EW from OW at Barclays saying they expect challenges to persist beyond the near-term de-stocking issue due to inevitable ASP reductions, market share losses, and an FX rate that is currently trending unfavorably (tgt to $152 from $274).

·     TOST -2%; was downgraded to Neutral from Buy at Mizuho on reduced ests and nearly halve tgt to $16 from $30.

·     TSLA -1%; Q3 deliveries were 435,059 vehicles, down nearly 7% q/q (missing ests between 450-460k) and produced 430,488 vehicles in Q3, compared with 479,700 in Q2 and 365,923 y/y.