Greetings,
Get ready for a week that puts the US consumer front and center, as the spotlight turns to major Big Box retailers’ quarterly reports and the release of July’s retail sales data.
Leading the earnings charge are retail giants Home Depot (HD), Target (TGT), and Walmart (WMT), with TJX Companies (TJX), Ross Stores (ROST), and Deere & Co. (DE) also in the earnings lineup.
Keep an eye out for the July retail sales report, scheduled for release on Tuesday morning. Additionally, the Federal Reserve’s July meeting minutes are set to hit the newsstands on Wednesday afternoon.
The previous week saw mixed performance, with a subdued August trading rhythm persisting through the first full week of the month. The Dow Jones Industrial Average (^DJI) displayed modest gains of 0.6% over the week, while the S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) experienced declines. As we enter the third week of August, both the Nasdaq Composite and S&P 500 find themselves at their lowest points in a month.
The Consumer Price Index (CPI) report of the previous week captured attention, revealing a temporary pause in the rapid cooling of headline inflation, with a 3.2% rise in July after a 3% increase in June.
However, economists were more intrigued by the sustained low monthly price increases for the past two months. Core CPI, which excludes volatile categories such as food and energy, posted a 0.2% increase in both July and June, marking the first consecutive months with such modest rises since February 2021.
Morgan Stanley’s Chief US economist, Ellen Zentner, commented on this month’s core CPI print, interpreting it as indicative of an ongoing deceleration in inflation. After half a year of 0.4% month-over-month increases, two consecutive 0.2% increases signal a diminishing pace.
Forecasts by most Wall Street economists now suggest the Fed will maintain interest rates in the upcoming September meeting.
Bank of America’s US economist, Michael Gapen, noted that the Fed aims to cautiously navigate the final phase of its rate-hiking cycle, avoiding any premature interference with the business cycle, should inflation already be aligning with targets.
Market sentiment currently implies an approximately 89% chance that the Fed will stand firm at its September meeting. This probability has risen from 72% on July 11, based on data from CME Group.
Mark your calendars for Wednesday at 2 p.m. ET, when the minutes from the Fed’s July meeting will be unveiled, providing additional insights into the future trajectory of policy.
Retail in the Limelight
The summer of 2023 has witnessed the robust resilience of the American consumer, standing out as a prominent narrative. From entertainment icons like Barbie to economists reconsidering recession forecasts, the consumer’s steadfast spending has been the theme.
The corporate realm echoes a similar story—major banks and select airlines have depicted a slowdown, yet the consumer’s spending spree continues to exceed expectations, propelling unexpected growth in the US economy.
The forthcoming week promises a deeper dive into American spending habits, probing whether companies are observing the anticipated consumer slowdown in the latter half of the year.
On Tuesday at 8:30 a.m. ET, the July retail sales report will shed light on this matter, with economists predicting a 0.4% increase in sales compared to the prior month. June witnessed a 0.2% uptick in retail sales.
Bank of America economist Aditya Bhave expects a robust July sales report, citing strong spending during the July 4 holiday based on credit and debit card data. Projections indicate above-consensus gains of 0.7% and 0.6% in the Census Bureau’s retail sales figures for July, excluding automobiles and encompassing the core control group.
From a corporate standpoint, attention will zero in on whether cracks observed in the retail sector three months ago have widened.
In May, Home Depot signaled that consumers were gravitating toward smaller home projects and fewer significant purchases. Meanwhile, Target reported sluggishness in its discretionary business segment, which includes items like technology and clothing.
Investors scrutinizing Target and Walmart will focus on same-store sales, signs of any consumer shift, the impact of cooling inflation on profit margins, and the prevalence of retail-related crimes.
At Target, the aftermath of consumer backlash against the Pride Collection introduced in May remains a topic of interest. For Walmart, investors will assess how its grocery and pharmacy offerings differentiate it from competitors.
UBS analyst Michael Lasser remarked, “The question is what happens in the back half of the year and into next year as some of the excess savings are worked down and the labor market becomes a little less certain.” He anticipates mixed results and a cautious tone from retailers as consumer pressures persist.
Stay tuned as the week unfolds, revealing the intricate threads that shape the economic tapestry.
