US EARLY MORNING: US equity futures are flat, but Treasuries are rallying in sympathy with Gilts after soft UK inflation; GS earnings ahead

US PRE-MARKETS: US equity futures are flat, but US Treasuries are rallying. The global macro mood has been supported on Wednesday by lower-than-expected inflation data out of the UK, which has tilted market expectations of the BoE’s rate course in a dovish direction (see below for a recap of the data; our European cash open note is here). Tuesday's rally on Wall Street was underpinned by gains in banking names after earnings releases from Bank of America (BAC), Morgan Stanley (MS), Bank of New York Mellon (BK), and others; today, heavyweight Goldman Sachs (GS) will report in the premarket; the bar has been raised somewhat given the solid reports from its peers, but Goldman has been debasing expectations in the run-up to its release – the FT this week carried an article noting that Wall Street is divided over just how bad GS' earnings will be. But it does appear that the bank has been taking measures to improve performance ahead; Reuters reports that Goldman's board supports CEO Solomon's focus on the core Wall Street businesses and asset management, and is "intensely focused" on his refreshed strategy after its foray into consumer banking saddled it with losses.

CS LIFTS SPX VIEW: Credit Suisse lifts its end-2023 S&P 500 price target to 4,700, underpinned by better economic dynamics and tech earnings growth. The bank notes that while the cap-weighted index has jumped around 17.8% YTD, the median S&P 500 stock advanced 7.8%. "These strong returns are not altogether unjustified, given the economy’s improvement, a decline in near-term recession risk, and strong positive revisions in the largest TECH+ names," it writes, adding that "following a five-quarter TECH+ EPS recession, profits for the group are expected to add meaningfully to growth through year-end 2024." CS is also raising its 2023 and 2024 EPS view to USD 220/shr (prev. 215) and USD 237/shr (prev. 220); the 2024 view is based on 4-5% organic earnings growth (on 3-4% nominal GDP), 1-2% additional growth from a rebound in TECH+ profits, and 1.5-2% in buybacks. "Importantly, we expect the median company to deliver stronger returns than the cap-weighted benchmark in the back half of the year." Its base case is that a recession will be averted, inflation will remain sticky near current levels, and monetary policy will tighten incrementally. However, it says that downside risks to its thesis could stem from elevated P/Es and depressed volatility limiting stock upside, which has been seen historically, and additionally, it says there are signs of a potential credit contraction, while economic weakness in China could also hamper US growth. On the other side, upside risks could be seen if there is a more rapid decline in inflation, which could lead to greater Fed dovishness.

UK INFLATION: Data released today showed UK headline consumer prices eased to 7.9% Y/Y in June (exp 8.2%, prev. 8.7%); the core measure eased to 6.9% Y/Y (exp. 7.1%, prev. 7.1%), while the all-services measure of CPI cooled to 7.2% Y/Y from 7.4%. The lower than expected prints triggered a rally in Gilts, which also buoyed other major fixed income peers. Pantheon Macroeconomics noted that the data was underpinned by slowdowns in core CPI and food CPI, while unusually warm weather also provided temporary support for clothing demand. It says that ahead, the headline rate of CPI inflation is expected to continue falling quickly, averaging about 7.00% in Q3 and 4.5-5.0% in Q4, as electricity and natural gas prices decline, and food CPI inflation falls sharply in Q3. Pantheon says the June inflation data will give the BoE the green light to increase the rates by 25bps next month, rather than the larger 50bps that was expected by markets. Money market pricing tilted towards the lower hike in wake of the release, and now price around a 66% probability of a 25bps move (vs around 42% prior to the release). Expectations of the terminal rate also pared back, with markets pricing the peak at around 5.8% in February next year (vs around 6% before the release).

TODAY’S AGENDA:

• Our interactive calendar is here; a pdf version can be accessed here.


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  EUROPE: Final Eurozone inflation metrics for June may see upward revisions to the M/M rates for both headline and core HICP. On the supply slate, Germany will sell EUR 2.5bln in 2052 and 2053 debt; the UK GBP will sell 3.75bln of 2028 debt. On the speaker's schedule, BoE's Ramsden will speak on QT.


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  NORTH AMERICA: The rate of building permits in June is expected to pare slightly, while housing starts are seen declining. Weekly MBA mortgage applications will be eyed after the 30yr mortgage rate jumped above 7.0% last week. The Treasury will reopen a 20yr bond for USD 12bln.


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  US CORPORATE EARNINGS: Today’s highlights include ELV, USB, GS, NFLX, TSLA, IBM; our daily US Earnings Estimates sheet can be accessed here.


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  ENERGY: The DoE will release its weekly energy inventories. The API’s equivalent report released Tuesday reportedly showed headline crude stocks -0.8mln (exp. -2.3mln), Cushing -3.0mln, gasoline -2.8mln (exp. -2.1mln), and distillate -0.1mln (exp. -0.1mln).

EQUITY NEWS:

TECH:

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  Microsoft (MSFT) - Microsoft will introduce generative AI features in its Microsoft 365 service at a cost of USD 30 per month, increasing the average monthly cost by 53-83% vs the average monthly cost of business-grade versions of the Microsoft 365 service. Shares spiked after the announcement to a new record high.


• 
  Microsoft (MSFT), Meta Platforms (META) - Microsoft and Meta announced support for the Llama 2 family of large language models on Azure and Windows. The companies said that the partnership aims to democratise AI and empower developers to build generative AI-powered tools and experiences. Azure customers can now use Llama 2 models easily on Azure, and Windows developers can leverage Llama 2 for AI experiences.


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  ASML Holding (ASML) - Q2 revenue EUR 6.9bln (exp. 6.73bln), Q2 net income EUR 1.9bln (exp. 1.82bln). Q2 order bookings +20% Q/Q at EUR 4.5bln (exp. 3.98bln). Q2 interim dividend EUR 1.45/shr. Gross margin 51.3%. Sees Q3 revenue between EUR 6.5-7.0bln (exp. 6.42bln), sees Q3 gross margin falling to 50%. Raised FY guidance, now expects FY23 net sales to grow towards 30%. CEO said customers were more cautious due to continued macro uncertainties, and therefore, it expects a later recovery, adding that the shape of the recovery slope was still unclear. However, it noted a strong backlog of around EUR 38bln. It was it was waiting for further understanding of US export rules to China, and does not expect additional US measures to have a major impact on its prior guidance. Elsewhere, Dutch rules on DUV exports were in-line with previous guidance.


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  Intel (INTC) - Intel and ASUS have reached a term sheet agreement for the manufacturing, selling, and support of Intel's Next Unit of Compute systems. ASUS will receive a license to Intel's NUC system designs and will develop future designs to ensure continuity for Intel NUC systems customers.


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  Salesforce (CRM) - Chairman Marc Benioff sold 15k shares at USD 228.86/shr on July 17th for a total USD 3.43mln.


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  Stratasys (SSYS), Nano Dimension (NNDM) - Stratasys shareholder Nano Dimension urged Stratasys shareholders to vote against the current board members and support Nano Dimension's director nominees. They criticised the board's personal backgrounds, governance practices, and potential conflicts of interest, calling for a change in leadership.


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  GitLab (GTLB) - GitLab appointed Chris Weber as new chief revenue officer, replacing Michael McBride, who will assist with the transition until August 1st. GitLab reiterates Q2 EPS outlook of between -0.03 and -0.02 (exp. -0.03), reiterates Q2 revenue outlook for between USD 129-130mln (exp. 129.8mln); it also backed its FY24 EPS outlook for between -0.18 and -0.14 (exp. -0.14), and FY24 revenue between USD 541-543mln (exp. 542.8mln).


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  Shopify (SHOP) - Shopify has reportedly held discussions to invest in online wholesale marketplace company Faire. The potential deal could involve Shopify acquiring a 5% stake in Faire, although the exact value of the investment is undisclosed. Faire was valued at USD 12.5bln in May 2022.


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  Aurora Innovation (AUR) - Aurora is conducting a public offering of up to USD 200mln of its Class A shares. Additionally, it has entered into a private placement agreement to sell approximately USD 600mln of its Class A common stock to institutional investors. Shares slipped almost 10% in afterhours trading.

COMMUNICATIONS:

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  AT&T (T) - AT&T leaned-back on a WSJ report regarding its Lake Tahoe cables, stating that they strongly disagree with the claim that the cables pose a public health concern. AT&T has submitted a supplemental status report regarding the cable removal process.


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  Omnicom (OMC) - Q2 2023 EPS 1.82 (exp. 1.80), Q2 revenue USD 3.61bln (exp. 3.62bln). Exec said the balance of the year will continue to see economic uncertainty, but added that Omnicom has secured leading positions in generative AI technologies and partnerships.

CONSUMER CYCLICAL:

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  Automakers - EU new car registration growth pared to 17.8% Y/Y in June from 18.5% in May.


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  Carvana (CVNA) - Used-car retailer Carvana surprised by announcing a last-minute change to its earnings release; the company will now report Q2 results earlier than expected, leading to a decline in its shares as investors perceived the change as negative news, Bloomberg reports.

CONSUMER STAPLES:

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  Constellation Brands (STZ) - Constellation has reached agreements with investment firm Elliott Management; will appoint two new independent directors to the board, share confidential information with Elliott. Constellation also expanded its board, will limit its size but has room to add one more member. The agreements aim to facilitate collaboration and unlock Constellation's growth potential, MarketWatch reported.

MATERIALS:

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  Rio Tinto (RIO) - Rio expressed concerns about a global economic slowdown, citing challenges in China's property market and a manufacturing slowdown in advanced economies. It reported slightly lower Q2 iron ore shipments due to a train derailment but expects to meet its FY shipment forecast. However, Rio downgraded its expectations for refined copper and alumina production, warned of rising costs, and mentioned wildfires impacting Canadian iron ore production. Q2 Pilbara iron ore output was 81.3mln tons (prev. 78.6mln Y/Y), iron ore shipments 79.1mln tons (prev. 79.9mln Y/Y), mined copper 145k tons (prev. 126k Y/Y), aluminium output 814k tons (prev. 731k Y/Y). Lowers 2023 refined copper output guidance to 160k-190k tons and lowers 2023 alumina production guidance to 7.4mln-7.7mln tons. Expects to deliver shipments in the upper half of the guidance range for the year.


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  Vale (VALE) - Vale reported a 6% increase in iron ore production compared to the previous year. Copper production and sales also rose significantly, while nickel production improved. The company expects a smaller production-to-sales gap in the next quarter. Reiterates FY23 copper production view of between 335-370 kt, reiterates FY23 nickel production view of between 160-175 kt, reiterates FY23 iron ore production outlook for between 310-320 mt, and backed its FY23 pellets production view 36-40 mt2. The miner also said it has reached full capacity at the Sol do Cerrado solar energy project in Brazil. The project, with an installed capacity of 766 MW, will supply 16% of Vale's energy consumption and help reduce its carbon emissions.


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  Antofagasta (ANFGF) - Q2 Production Update: Copper 149.6k/T, +2.5% QQ; Gold 44k/oz, +4.3% QQ. FY23 guidance: Copper 640-670k/T.


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  Chemours (CC), Honeywell (HON) - Chemours and Honeywell have partnered with Greek authorities to prevent illegal refrigerant imports into the EU through the Greek border. They seized and determined unauthorised refrigerants, which will be safely destroyed. This collaboration aims to protect intellectual property and combat illegal trade of refrigerants.

INDUSTRIALS:

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  JB Hunt (JBHT) - Q2 EPS 1.81 (exp. 1.92); Q2 revenue -18% Y/Y at USD 3.13bln (exp. 3.31bln); JBHT said revenue decline primarily driven by a decrease in revenue per load of 24% in Integrated Capacity Solutions, 13% in Intermodal, and 21% in Truckload, and a 4% decline in productivity in Dedicated Capacity Solutions, as a result of changes in customer rate, freight mix and lower fuel surcharge revenue. Volume declines of 7% in JBI, 26% in ICS, 4% in DCS, and stop count decline of 24% in Final Mile Services also contributed to the Y/Y decline in revenue, partially offset by a 6% increase in JBT volume. Current quarter total operating revenue, excluding fuel surcharge revenue, decreased 14% versus the comparable quarter 2022.


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  AAR Corp. (AIR) - Q4 adj. EPS 0.83 (vs 0.72 Y/Y), Q4 revenue USD 553mln (vs 476.1mln Y/Y). Exec said domestic and international demand for commercial air travel was increasing, and its airline customers expect the trend to continue, adding that it has seen sustained high demand.


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  Raytheon Technologies (RTX) - RTX was awarded a USD 256.32M Navy contract modification, which exercises an option to provide depot level maintenance and repair for all fielded F135 propulsion systems at the F-35 production sites and operational locations.

ENERGY:

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  US Energy Inventories - API data reportedly showed headline crude stocks -0.8mln (exp. -2.3mln), Cushing -3.0mln, gasoline -2.8mln (exp. -2.1mln), and distillate -0.1mln (exp. -0.1mln), according to Citi.


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  Saudi Aramco - Aramco Total Refining and Petchem Co. (SATORP) is planning to shut its Al Jubail refinery (450k BPD) for overhaul at the end of September or first half of October, according to Reuters. Will be shut for around 45 days.

UTILITIES:

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  Black Hills (BKH) - Black Hills Energy's Colorado intrastate natural gas pipeline received approval for new rates from the Colorado Public Utility Commission. The approved settlement agreement will generate approximately USD 8.2mln in annual revenues, with the new rates becoming effective from July 15th.

FINANCIALS:

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  Morgan Stanley (MS) - Morgan Stanley is relocating over 200 technology developers from mainland China to Hong Kong and Singapore due to increased restrictions on accessing data in China, Bloomberg reports. The bank is also building a separate system in China to comply with local regulations.


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  KKR (KKR) - KKR is leading a USD 190mln Series C funding round for MUSINSA, an online fashion platform in South Korea. The investment aims to support MUSINSA's growth in the fast-growing Korean fashion market and expand its global presence.


• 
  Interactive Brokers (IBKR) - Q2 2023 adj. EPS 1.32 (exp. 1.40), Q2 revenue USD 1.0bln (exp. 1.06bln). Q2 commission revenue USD 322mln. Q2 customer trading volume mixed across product types; options contracts volume +9%, futures contracts -3%, stock volumes -28%). Q2 customer accounts +19% to 2.29mln.


• 
  Western Alliance (WAL) - Q2 EPS 1.96 (exp. 1.98), Q2 revenue USD 669.3mln (exp. 651.9mln), Q2 net interest margin 3.42% (exp. 3.5%), Q2 net interest income 550.3mln (exp. 565.4mln), Q2 provision for credit losses USD 21.8mln (exp. 24.1mln), Q2 non-interest expenses USD 387.4mln (exp. 354.2mln), Q2 net charge-offs 7.4mln (exp. 11.2mln). Exec said it continued to execute its balance sheet repositioning strategy and return to normal business operations by bolstering liquidity and capital. Q2 deposits grew USD 3.5bln, and lowered its HFI loan-to-deposit ratio to 94%, with total insured and collateralised deposits representing 81% of deposits and available liquidity coverage of 276% of uninsured deposits.


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  Pinnacle Financial (PNFP) - Q2 EPS ex-items 1.79 (exp. 1.63), Q2 revenue USD 489.2mln (exp. 414.9mln). Reported deposit growth of over USD 1.5bln in the quarter. Said loan growth was USD 855mln (+11.3% linked-quarter annualised); the amount was consistent with the outlook provided in Q1.

REAL ESTATE:

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  Extra Space Storage (EXR), Life Storage (LSI) - Stockholders of Extra Space Storage and Life Storage approved the proposed merger between the two companies. Life Storage stockholders will receive 0.895 shares of Extra Space common stock for each share of Life Storage common stock they own. The merger is expected to close on July 20th.

HEALTHCARE:

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  Johnson & Johnson (JNJ) - Johnson & Johnson has been ordered to pay USD 18.8mln to a man in California who claimed their talcum-based powders caused his cancer, Bloomberg reports. This is the company's first trial in two years over allegations of hiding health risks associated with their baby powder. J&J plans to appeal the verdict.


• 
  Moderna (MRNA) - President Stephen Hoge sold 15k shares on July 17th for USD 120.60/shr.

19 Jul 2023 - 09:01- Fixed IncomeData- Source: Newsquawk