Today's brief

Closing Summary - Hawkish FOMC tone weighs but losses kept in check

The S&P 500 declined 0.5% on Wednesday, as the market weighed a hawkish-sounding FOMC policy announcement against an accommodative tone from Fed Chair Powell. The Nasdaq Composite (-0.2%) and Russell 2000 (-0.2%) both declined just 0.2% while the Dow Jones Industrial Average declined 0.8%. 

To start, the FOMC did what most market observers were expecting: it kept the target range for the fed funds rate near zero and maintained the pace of asset purchases by at least $120 billion per month. The central bank also remained committed to the view that recent inflation pressures have largely been due to transitory factors. 

The hawkish part stemmed from the Fed's interest-rate projections signaling a rate hike by the end of 2023, versus a prior indication of leaving rates unchanged through 2023. What's more, the Fed increased the interest on excess reserves to 0.15% from 0.10%, and the reverse repurchase rate was increased by five basis points to 0.05%. 

The S&P 500 was down as much as 1.0% during the start of Fed Chair Powell's follow-up press conference while the fed-funds-sensitive 2-yr yield rose five basis points to 0.21%. The 10-yr yield touched 1.59% before settling at 1.57%, or seven basis points above yesterday's settlement. The U.S. Dollar Index rose 0.8% to 91.28.

The benchmark index briefly returned to pre-FOMC levels, reportedly after Fed Chair Powell said this was the "talking about talking about [tapering asset purchases]" meeting and that the Fed will provide advanced notice before announcing any decision to make changes to asset purchases. The Fed Chair once again reiterated that interest-rate projections are not a good forecasting tool. 

Ten of the 11 S&P 500 sectors still closed in negative territory, though, including utilities (-1.5%), consumer staples (-1.2%), and materials (-1.2%) with losses over 1.0%. The consumer discretionary sector (+0.2%) was the only sector that closed higher, largely due to Amazon (AMZN 3415.25, +32.12, +1.0%) and Tesla (TSLA 604.87, +5.51, +0.9%). 

In other developments, housing starts and building permits data for May missed consensus expectations, Citigroup (C 71.46, -2.36, -3.2%) warned trading revenue for the second quarter could drop 30% yr/yr, and Oracle (ORCL 77.08, -4.58, -5.6%) issued downside EPS guidance for its fiscal first quarter. 

WTI crude futures settled relatively unchanged at $72.06/bbl.

Reviewing Wednesday's economic data:

  • Total housing starts increased 3.6% month-over-month to a seasonally adjusted annual rate of 1.572 million units (Briefing.com consensus 1.635 million). Total permits decreased 3.0% month-over-month to 1.681 million (Briefing.com consensus 1.730 million).
    • The key takeaway from the report is that while housing starts showed a larger than expected increase, building permits decreased in most regions, which is not going to help alleviate the ongoing supply shortage.
  • Import prices increased 1.1% in May, while import prices excluding oil increased 0.9%. Export prices increased 2.2% in May, while export prices excluding agriculture increased 1.7%.
  • The weekly MBA Mortgage Applications Index increased 4.2% following a 3.1% decline in the prior week.

Looking ahead, investors will receive the weekly Initial and Continuing Claims report, the Conference Board's Leading Economic Index for May, and the Philadelphia Fed Index for June on Thursday.

  • Russell 2000 +17.2% YTD
  • S&P 500 +12.5% YTD
  • Dow Jones Industrial Average +11.2% YTD
  • Nasdaq Composite +8.9% YTD

Overseas: 

  • Europe: DAX -0.1%, FTSE +0.2%, CAC +0.2%
  • Asia: Nikkei -0.5%, Hang Seng -0.7%, Shanghai -1.1%

Commodities: 

  • Crude Oil -0.01 @ 72.06
  • Nat Gas +0.02 @ 3.25
  • Gold +5.20 @ 1861.50
  • Silver +0.11 @ 27.82
  • Copper +0.05 @ 4.39

Spotlight Comment: Oracle takes a hit on guidance, but spending on cloud is a good idea

Oracle (ORCL) wrapped up FY21 on a high note with a huge beat, but the stock is taking a hit today in light of below-consensus guidance. We do not view the pullback as a total negative; it could present a good entry point. We are fans of Oracle, as its cloud business is starting to become quite substantial. The company sort of reminds us of Microsoft (MSFT) when it was out of favor a few years ago. We like the upside potential and multiple expansion possibilities available with Oracle.

  • In Q4 (May), Oracle reported adjusted EPS of $1.54. The $0.21 upside was by far its largest EPS beat in the past five years, representing a significant acceleration from the $0.04-0.07 upside seen in the four prior quarters. Revenue was also upside; every product, every region, and every metric exceeded expectations.
  • The knock on Oracle has been that it was late to the game in terms of cloud computing. This is a fair criticism. However, more and more of its traditional software business has slowly been transitioning from on-premise to the cloud. Cloud services and license support revenue rose 8% in Q4 to $7.4 bln, driven by Fusion, Autonomous Database, and Gen2 OCI Cloud. That was a nice acceleration from 5% growth in Q3. Cloud license and on-premise license revenue rose 9% to $2.1 bln, a huge increase from Q3's 4% increase to $1.3 bln.
  • Turning to that disappointing guidance: Oracle expects Q1 (Aug) adjusted EPS of $0.94-0.98, a good bit below the $1.03 consensus, while revenue guidance was in-line. The downside guidance seems not to be derived from lack of demand; on the contrary, Oracle's business is picking up: the company announced plans to roughly double its Cloud CapEx spend in FY22 to nearly $4 bln.
  • Oracle sees cloud as being fundamentally a more profitable business, compared to on-premise. But you have to spend money to make money. Oracle feels now is the right time to increase investment to capture market share. Also, it makes a good argument that it has the highest non-GAAP operating margins of all of its competitors (47% in FY21 vs 44% in FY20), so it can afford a near-term hit to margins for the greater long-term good.

Bottom line, we are fine with Oracle stepping on the gas in terms of building out its cloud infrastructure and taking a near-term hit to margins. Oracle has been landing many new customers, with some very large users coming online recently that require significant amounts of capacity. If anything, we see today's pullback as creating a nice entry point, and we think we'll look back later this year or early next year to confirm this.

Today's News Summary:

For a full rundown of today's market and after hours developments, see Live In Play

  • Earnings/Guidance (Full Earnings Calendar):
    • AT&T (T) provides update on its outlook; expects WarnerMedia to benefit from improvements in ad revs in 2H21
    • Avita Medical (RCEL) guides JunQ revs above consensus
    • Azure Power (AZRE) reports 4Q21 (Mar) GAAP net loss per share of ($0.79), operating revenue increased 16.0%, guides for FY22 and Q1
    • Citigroup (C) CFO says revenue from trading operations will probably fall, according to Bloomberg
    • H & R Block (HRB) beats by $0.10, reports revs in-line; announces 4% dividend increase; changes fiscal year-end from April 30 to June 30, effective immediately
    • Herman Miller (MLHR) plans to launch the syndication of a senior secured term loan B facility; expects net sales and orders for the Q4 to reflect sequential improvement from the levels reported in Q3 (Capital IQ consensus -1.3% qtr/qtr)
    • La-Z-Boy (LZB) beats by $0.13, beats on revs, expects temporary negative impact to profit margins due to rising raw material prices
    • Oracle (ORCL) beats by $0.21, beats on revs; guides AugQ EPS below consensus as co expects to roughly double Cloud CapEx spend in FY22 to capture market share; guides AugQ revs in-line
    • Select Energy Services (WTTR) provides operations and business updates; Capex still within guidance
    • StepStone Group (STEP) beats by $0.08, misses on revs
  • General News:
    • FOMC makes no changes to fed funds rate or size of asset purchases; dot plot shows expectations for two hikes by the end of 2023
    • Fed increased interest on excess reserves to 0.15% from 0.10% while the reverse repurchase rate was increased by five basis points to 0.05%.
    • Fed Chairman Powell to testify before the House Select Subcommittee on COVID-19 on June 22.
    • Treasury Secretary Yellen testified before the Senate Finance Committee, saying that inflation is being monitored "very carefully" and taken "seriously."
    • Opposition from progressive Democrats could derail bipartisan infrastructure plans. However, Senate Majority Leader Chuck Schumer wants to try to pass both a bipartisan infrastructure deal and budget resolution in July, which starts the reconciliation process so Democrats can pass rest of bill without Republicans, according to Politico
    • A Louisiana judge blocked President Biden's executive order banning nationwide oil drilling on federal lands, according to the Wall Street Journal
    • President Biden will select Lina Khan as FTC chair who is critical of large technology companies, according to the New York Times
    • China aiming to release reserves of industrial metals, according to the Wall Street Journal
    • Fewer than 30% of workers have returned to offices in major cities, according to the Wall Street Journal
    • Israel conducted airstrikes on Gaza Strip after Hamas sent incendiary balloons into Israel, according to the New York Times
    • Biden Administration considering small cut to biofuel targets, according to Bloomberg
    • Akamai Tech (AKAM) announces platform security enhancements to strengthen protection for web applications, APIs, and user accounts; launches new Account Protector solution
    • Altimmune (ALT) reports interim data from ALT-801 Phase 1 trial
    • Amazon (AMZN) commits to new affordable housing units
    • American Tower Partners (AMT) With Allianz (ALIZY) in Europe
    • Apple (AAPL) healthcare initiatives have struggled, according to the Wall Street Journal
    • Applied Materials (AMAT) unveils a new way to engineer the wiring of advanced logic chips that enables scaling to the 3nm node and beyond
    • Aptinyx (APTX) provides update on NYX-783 development program; finalizes design of Phase 2b program for treatment of post-traumatic stress disorder
    • Atea Pharmaceuticals (AVIR) hits development milestone for milestone AT-527 with Roche (RHHBY)
    • BioCryst Pharma (BCRX) announces acceptance and accelerated review of the ORLADEYO marketing application by the Israeli Ministry of Health
    • Canaan (CAN) advances strategic partnership with Genesis digital assets via sale of 10,000 bitcoin mining machines
    • Capital One (COF) and Williams-Sonoma (WSM) announces strategic partnership
    • Cellcom Israel (CEL) announces Xfone filed a motion under the insovency law
    • CRISPR Therapeutics (CRSP) gets FDA Orphan drug designation for treatment of T-cell Lymphoma, according to FDA website
    • Dicerna Pharmaceuticals (DRNA) announces dosing completion in Nedosiran PHYOX clinical trial for treatment of primary hyperoxaluria type 3
    • Eton Pharmaceuticals (ETON) acquires US and Canadian rights to ZENEO hydrocortisone needleless autoinjector
    • Facebook (FB) CEO tests live audio, according to TechCrunch
    • Freeline Therapeutics (FRLN) announced dosing of the second patient in the ongoing Phase 1/2 MARVEL-1 clinical trial of FLT190, its liver-directed AAV gene therapy candidate for Fabry disease
    • G-III Apparel (GIII) announces transition of COO Wayne Miller to Senior Strategic Advisor, effective July 1
    • Houghton Mifflin Harcourt (HMHC) pays down approx. $337 mln of outstanding debt with divestiture of consumer publishing biz, HMH Books & Media
    • Ironwood Pharma (IRWD) announces full results from LINZESS Phase IIIb trial published in The American Journal of Gastroenterology
    • KVH Industries (KVHI) introduces TracPhone LTE-1 global cellular marine communications solution for offshore internet access
    • Lineage Cell Therapeutics (LCTX) announced that Kevin Cook will join as the Company's Chief Financial Officer, effective June 21
    • MacroGenics (MGNX) and Zai Lab collaborate to develop and commercialize preclinical bispecific antibodies in oncology
    • Mannkind (MNKD) and United Therapeutics (UTHR) achieve a major milestone in the development of Tyvaso DPI with new drug application acceptance from the FDA
    • MFA Financial (MFA) increases quarterly cash dividend to $0.10/share from $0.075/share
    • Microsoft (MSFT) Windows 11 (which is due to be introduced on June 24) has leaked online, according to Thurott
    • Mitek Systems (MITK) authorizes a share repurchase program for up to $15 mln of its common stock
    • Oxford Industries (OXM) increases quarterly cash dividend to $0.42/share from $0.37/share
    • Paratek Pharma (PRTK) announces initiation of phase 2b study in nontuberculous mycobacterial pulmonary disease caused by mycobacterium abscessus complex with NUZYRA
    • PC Connection (CNXN) announces that it has earned Google Cloud (GOOG) premier partner status
    • Portland Gen Elec (POR) is seeking to procure resources to fill PGE's identified 2025 capacity need
    • Regeneron Pharma (REGN) reports Phase 3 RECOVERY trial meets primary endpoint
    • Ring Energy (REI) provides update on previously announced program to drill and complete three wells
    • Roblox (RBLX) reports May 2021 key metrics; Daily Active Users (DAUs) up 28% yr/yr, down 1% from April 2021
    • Romeo Power (RMO) announces the appointment of seasoned executive leader Kerry A. Shiba to the role of Chief Financial Officer, effective July 6, 2021
    • Royal Caribbean (RCL) postponing Odyssey's inaugural sailing from July 3 to July 31, 2021 after positive COVID cases
    • SI-BONE (SIBN) receives national reimbursement policy for iFuse-3D Implant System from French Health Ministry
    • Southwest (LUV) cancelled 500 flights amid computer issue, according to Reuters
    • Spero Therapeutics (SPRO) initiates two Phase 1 trials of SPR206
    • SpringWorks Therapeutics (SWTX) Announces Presentation of Updated Interim Data from the Phase 2b ReNeu Trial at the 2021 Children's Tumor Foundation NF Conference
    • Starbucks (SBUX) announces several leadership changes including new COO; all changes effective as of June 28, 2021
    • TripAdvisor (TRIP) launches of Tripadvisor Plus, a new annual subscription
    • United Therapeutics (UTHR) announces FDA acceptance of Tyvaso DPI new drug application for priority review
    • Williams Cos (WMB) announces deepwater export agreement at Shenandoah
    • W.R. Berkley (WRB) declares $0.50/share special dividend; increases quarterly dividend to $0.13 from $0.12/share

Notable Ratings

(see Upgrades/Downgrades calendar for full list):

  • Upgrades:
    • Banco Bilbao Vizcaya Argentaria (BBVA) upgraded to Buy from Hold at Societe Generale
    • Carnival (CCL) upgraded to Outperform from Peer Perform at Wolfe Research
    • DISH Network (DISH) upgraded to Buy from Hold at Pivotal Research Group; tgt raised to $60
    • Enersys (ENS) upgraded to Buy from Neutral at BTIG Research; tgt $125
    • Evergy (EVRG) upgraded to Buy from Neutral at Goldman; tgt $72
    • First Bancorp (FBNC) upgraded to Overweight from Neutral at Piper Sandler; tgt raised to $51
    • Norwegian Cruise Line (NCLH) upgraded to Outperform from Peer Perform at Wolfe Research; tgt $36
    • PerkinElmer (PKI) upgraded to Outperform from Peer Perform at Wolfe Research
    • Royal Caribbean (RCL) upgraded to Outperform from Peer Perform at Wolfe Research; tgt $94
  • Downgrades:
    • 17 Education & Technology Group (YQ) double-downgraded to Underweight from Overweight at Morgan Stanley; tgt $3
    • Ameren (AEE) downgraded to Neutral from Buy at Goldman; tgt $90
    • BioNTech (BNTX) downgraded to Sell from Neutral at Redburn; tgt $146
    • Guidewire Software (GWRE) downgraded to Hold from Buy at Needham
    • Insight Enterprises (NSIT) downgraded to Neutral from Overweight at JP Morgan; tgt $106
    • Kinder Morgan (KMI) downgraded to Hold from Buy at Stifel; tgt $18
    • New Oriental Education & Technology (EDU) downgraded to Equal-Weight from Overweight at Morgan Stanley; tgt $8.60
    • SAGE Therapeutics (SAGE) downgraded to Neutral from Buy at Citigroup; tgt lowered to $68
    • TAL Education (TAL) double-downgraded to Underweight from Overweight at Morgan Stanley; tgt $21.50
    • Credicorp LTD (BAP) downgraded to Hold from Buy at Santander; tgt $145
    • Intercorp Financial (IFS) downgraded to Hold from Buy at Santander; tgt $31
    • ResMed (RMD) downgraded to Underperform from Neutral at BofA Securities; tgt raised to $221
  • Others:
    • Affirm (AFRM) initiated with a Buy at Mizuho; tgt $90
    • AppHarvest (APPH) initiated with an Overweight at Barclays; tgt $25
    • Bionano Genomics (BNGO) initiated with a Buy at BTIG Research; tgt $10
    • Carpenter Tech (CRS) initiated with a Neutral at JP Morgan; tgt $49
    • Cleveland-Cliffs (CLF) initiated with an Overweight at JP Morgan; tgt $39
    • Coinbase Global (COIN) initiated with a Buy at Canaccord Genuity; tgt $285
    • Commercial Metals (CMC) initiated with a Neutral at JP Morgan; tgt $39
    • Fortress Transportation and Infrastructure (FTAI) resumed with a Buy at Citigroup; tgt $40
    • GrafTech International (EAF) assumed with an Overweight at JP Morgan; tgt raised to $18
    • Maxar Technologies Ltd (MAXR) initiated with a Buy at Goldman; tgt $52
    • Nucor (NUE) initiated with a Neutral at JP Morgan; tgt $114
    • Primoris Services (PRIM) initiated with a Neutral at Goldman; tgt $35
    • Reliance Steel (RS) initiated with an Overweight at JP Morgan; tgt $181
    • Saratoga Investment (SAR) initiated with an Outperform at Oppenheimer; tgt $29
    • Sea Limited (SE) initiated with an Outperform at Bernstein
    • SLR Capital Partners (SLRC) assumed with an Outperform at Oppenheimer; tgt $21
    • SLR Senior Investment (SUNS) assumed with an Outperform at Oppenheimer; tgt $16
    • SoFi Technologies (SOFI) initiated with a Buy at Rosenblatt; tgt $30
    • Squarespace (SQSP) initiated with a Buy at Mizuho; tgt $80
    • Steel Dynamics (STLD) assumed with an Overweight at JP Morgan; tgt raised to $107
    • U.S. Steel (X) assumed with an Underweight at JP Morgan; tgt raised to $41
    • ZIM Integrated Shipping (ZIM) resumed with a Buy at Citigroup; tgt $60
    • Duck Creek Technology (DCT) resumed with a Buy at DA Davidson; tgt $50
    • Elastic (ESTC) initiated with an Outperform at SMBC Nikko; tgt $160
    • Forest Road Acquisition (FRX) initiated with a Buy at DA Davidson; tgt $14.50
    • Lion Electric (LEV) initiated with a Mkt Perform at Raymond James; tgt $22
    • MP Materials (MP) initiated with an Overweight at JP Morgan; tgt $41
    • NextGen Acquisition Corp. (NGAC) initiated with a Buy at Colliers Securities; tgt $15

Upcoming Events:

  • Econ data (Thursday):
    • 8:30 ET: Initial Claims for week ending June 12 (Briefing.com consensus 350,000; prior 376,000) and Continuing Claims for week ending June 5 (prior 3.499 mln)
    • 8:30 ET: Philadelphia Fed survey for June (Briefing.com consensus 30.0; prior 31.5)
    • 10:30 ET: Natural gas inventories for week ending June 12 (prior +98 bcf)
  • Earnings:
    • Monday (June 14)
      • Pre-Market: None of note
      • After-Hours: None of note
    • Tuesday (June 15)
      • Pre-Market:  None of note
      • After-Hours: HRB LZB ORCL STEP
    • Wednesday (June 16)
      • Pre-Market:  None of note
      • After-Hours: LEN
    • Thursday (June 17)
      • Pre-Market:  CMC JBL KR
      • After-Hours: ADBE SWBI
    • Friday (June 18)
    MDU Resources raises FY20 EPS guidance
    MDU Resources raises FY20 EPS guidanceMDU Resources raises FY20 EPS guidance
    TSA screened 1,284,599 airline passengers on Sunday, highest level since March (higher than any day during the Thanksgiving travel period)TSA screened 1,284,599 airline passengers on Sunday, highest level since March (higher than any day during the Thanksgiving travel period)