Mid-Morning Look

Friday, October 07, 2022

U.S. stock markets tumbling over 2% following a stronger than expected monthly jobs report, as it essentially solidifies another 75-bps interest rat hike by the Fed when they meet next and likely further aggressive hikes as they attempt to bring down inflation. Fed speakers have mentioned several times, including Fed Chair Powell at his Jackson Hole event in September, of the “pain” needed to tame the fastest inflation in more than forty years, and signaled further — and possibly larger — rate hikes. Stock markets have been certainly felt the pain, with a sharp steady grind the last few months – a few bounces in between – but the trend remains firmly lower. Investors were hoping for any sign of slowing in the jobs market, but nonfarm payrolls rose 263K (above est. 250K), unemployment dropped to 3.5% from 3.7% and wages advanced +0.3% – no sign of slowing. The market view remains that the “pain” the Fed see as required to drive inflation down to 2% will negatively impact future growth in consumer and business spend going forward, thereby impeding revenue and earnings generation. Technology stocks hit even harder following a 2^nd revenue guidance warning from chip maker AMD last night, citing lower than expected client segment revenue (semi-index falls as much as 4%). Treasury yields jumped, the dollar advanced and gold slipped on the rising rate expectations. Multiple hawkish Fed speakers overnight ruled out cutting rates in 2023, with three more members speaking today. Overall, a bleak picture to end what started as a great week, ahead of earnings season next week and key inflation readings with both the CPI and PPI results expected.

Economic Data

·     September nonfarm payrolls rose +263K vs. estimate +250K; private payrolls at +288K vs. est. +265K private jobs and manufacturing jobs rose +22K vs. est. +19K; the unemployment rate dropped to 3.5% vs. prior and estimate 3.7% and average hourly wages rose +0.3% M/M, in-line with consensus views. Labor participation rate 62.3% vs. 62.4% prior month. Average hourly earnings +5% y/y, slowest annual gain since December 2021.

Sector Movers Today

·     Auto sector: TSLA is kicking off production of its long-awaited Semi truck and will start deliveries to its first customer Pepsi from Dec. 1; LYFT downgraded to Sector Perform at RBC and lowers PT to $16 from $30 as U.S. driver supply analysis makes prior bullish thesis look increasingly less likely and believe UBER’s structural advantages are driving increased competitive intensity; Wholesale used-vehicle prices (on a mix, mileage, and seasonally adjusted basis) decreased 3.0% in September from August. The Manheim Used Vehicle Value Index declined to 204.5 and is now down 0.1% from a year ago. The non-adjusted price change in September was a decline of 2.1% compared to August, moving the unadjusted average price down 2.3% year over year (negative read for likes of auto dealers AN, CVNA, KMX, PAG and others)

·     Semiconductors: AMD issued its 2^nd revenue warning in less than 3-months, guiding preliminary Q3 revs about $5.6B, lower than prior outlook of $6.7B plus or minus $200M saying results reflect lower than expected client segment revenue (the lower guidance weigh on other chip stocks INTC, NVDA, QCOM, etc.); AEHR reported net sales growth and improved adjusted earnings in the fiscal first quarter; some chip names bounce after reports The White House is set to issue sweeping restrictions on selling semiconductors and chip-making equipment to China, an attempt to curb the country’s access to technologies https://nyti.ms/3V9PdUL

·     Transports, Industrial & Machinery: rising oil prices, rising interest rates taking its toll on travel and transport industry over the last few weeks; CHRW was downgraded to Neutral from Buy at Citigroup, becoming more concerned that weakness will show up in Global Forwarding, where Robinson is heavily exposed to spot ocean rates; Citi also lowered ests tgts on several truckers (ARCB, GXO, SAIA, SNDR, WERN) as sees an ongoing freight trend deceleration.

·     Bank movers: CS said it will spend around $3 billion to buy back senior bonds to save on interest payments as it prepares to reshape itself. Credit Suisse said it would repurchase parts of 12 dollar-denominated bonds it issued previously, for up to a total $2 billion and offering to buy back eight Euro and sterling bonds it issued, for up to a total of 1 billion euros; in research, GS upgraded from MP to OP at KBW based on valuation coupled with strong risk/reward returns while downgraded ZION to MP based on valuation and potential headwinds to TCE/TA due to the negative impact that higher rates have on AOCI and prefer CMA over ZION

Stock GAINERS

·     AMBC +9%; after BAC agreed to pay the mortgage insurer $1.84 billion, closing the last of the lender’s major lawsuits stemming from the 2008 mortgage crash

·     CANO +6%; after Bloomberg reported CVS is in exclusive talks to acquire the company https://bit.ly/3CjKsPF 

·     DKNG +3%; after Action Network’s Darren Rovell reports, citing sources, that the co and Disney are near signing an exclusive partnership https://bit.ly/3CEJ9MB

·     DXCM +7%; Medicare issued a Local Coverage Decision (LCD) proposal which appears to pave the way for near-term CGM coverage for basal insulin users according to Stifel. Piper said it was a positive as it would, at minimum, expand the CGM TAM in the US by 2x and potentially even more depending on the number of NIT2 patients it includes (also seen + for ABT)

·     HES +1%; hits 52-week high as energy stocks outperform with rise in WTI crude prices

·     MSOS +1%; Cannabis stocks (MSOS, ACB, CRON, CGC, TLRY, GTBIF, CURLF, CRLBF, TCNNF) extended Thursday’s rally after President Joe Biden pardoned thousands of Americans for possession and ordered a review of the drug’s legal status

Stock LAGGARDS

·     AMD -8%; issued its 2nd revenue warning in less than 3-months, guiding preliminary Q3 revs about $5.6B, lower than prior outlook of $6.7B plus or minus $200M saying results reflect lower than expected client segment revenue

·     CHRW -3%; was downgraded to Neutral from Buy at Citigroup, becoming more concerned that weakness will show up in Global Forwarding

·     CVS -7%; said the newly released Star Ratings for Medicare Advantage plans in 2023 lowered the rating for the company’s Aetna National PPO plan to 3.5 stars from 4.5

·     GNRC -4%; shares falling to fresh 52-week lows as industrials tumble

·     LAC 9%; after a U.S. federal judge has set a January 5, 2023, hearing for a lawsuit over Lithium Americas Corp’s proposed Thacker Pass lithium mine in Nevada.

·     LEVI -6%; Q3 EPS $0.40 vs. est. $0.37; Q3 sales rose 1.3% y/y to $1.52B, missing the $1.60B estimate; lowers FY22 EPS view to $1.44-$1.49 from prior $1.50-$1.56 (est. $1.54); lowers year revs to up 6%-7% from prior rise of 11%-13%

·     LYFT -7%; downgraded to Sector Perform at RBC and lowers PT to $16 from $30 as U.S. driver supply analysis makes prior bullish thesis look increasingly less likely

·     NVRO -10%; Oppenheimer said they remain cautious on NVRO following an update from UNH, which released an updated community plan (effective 12/1/22), deeming the usage of implanted spinal cord stimulators for non-surgical refractory back pain