Merchandising mayhem

 

 

1.  Gimme a sign.   Yesterdays chaos in the retail sector is a stark reminder of a topic which I often cover in an almost mantra-like fashion.   The consumer is everything.  Reminder:  consumption makes up over two thirds of US GDP and its continued strength has been the primary driver for the ongoing economic expansion.  Businesses and consumers are driven by different forces in their purchase decisions.  Businesses make rational decisions based on their assessments of current and forecasted sales and market conditions.  On that front, businesses have been slowing their investments for some time now and sentiment, particularly in manufacturing, has been weakening, as evidenced by PMI numbers.  Consumers on the other hand make more emotional decisions, changing their outlooks quite frequently.  Of course, being employed is a big factor and with unemployment rates near all-time lows, a consumers’ biggest fear is… fear of losing that job.  The trade war, a steady stream of weak economic data, growing corporate and government debt, struggles in the EU, and a broken legislature have not been enough to worry the consumer, as evidenced by consumer confidence numbers which, while a bit weaker of recent, still remain in healthy territory.  There are other signs worth watching when pondering the health of consumption.  One of those is retail sector performance, and this is the sector's big week, with most of the retail giants delivering their third quarter results.  Retailers historically experience a surge in the fourth quarter as a result of holiday purchases but that trend is shifting as consumers rely more heavily on online shopping where “Black Friday” deals start well before the onset of the current quarter.  This makes Q3 retail earnings more and more important.  Yesterday, Home Depot and Kohl’s announced earnings.  Home Depot beat earnings estimates and missed on revenues while Kohl’s missed both, by a mile.  Both retailers offered weak forward guidance.  The results sent not only their stocks, but the entire retail sector into a tail spin.  Could this be a canary in the coal mine for consumers?  This week’s earnings and next week’s official Black Friday will help paint a better picture.

 

2.  Attention to tension.  Negotiations with China appear to be continuing but some of the signs, or lack thereof, are starting to worry investors.  Despite Larry Kudlow’s statement last weekend, all of the other “official” information appears to be pointing to a large gap between the demands of the two sides… if one parses the text carefully.  Bond investors are certainly expressing their discomfort as evidenced by the recent not-so-highly-publicized flattening of the yield curve.  Just yesterday in a cabinet meeting, President Trump announced that he would raise more tariffs if China did not agree to a deal.  That is not the kind of statement we would expect when the two sides are down to the “short strokes” of a deal, as Kudlow put it.  Last night, WHILE YOU SLEPT, the Senate passed a bill supporting the Hong Kong protestors and warning China against violence.  The move provoked an angry response from China, as expected.  China needs a deal as its economy is struggling, however there is very little political pressure on President Xi, who is appointed for life.  Trump is under political pressure as we enter an election year.  Though these latest developments have thrown some cold water on the latest equity rally, investors remain hopeful that some deal can be reached, as pullbacks appear to be small, so far.

 

- The minutes from last month’s FOMC meeting will be released this afternoon at 2:00 PM EST.  Traders will look to understand the Fed’s logic behind their new wait and see strategy.

-  US Crude Oil Inventories are expected to have fallen to 1.149 million barrels from last week’s 2.219 million.

- This morning Lowe’s and Target both beat estimates and L Brands will announce after the bell.