Target Earnings Are Latest To Show Cautious Consumer, But Optimism Rises On Debt Ceiling

(Wednesday market open) Consumer spending is losing steam under pressure from rising prices and economic uncertainty. That’s what earnings from major retailers suggest so far this week, though stocks generally trended higher this morning on hopes for a debt ceiling solution.

Home Depot’s HD quarterly results misfire Tuesday established an initially sour tone for a late leg of the earnings season featuring several U.S. big-box retailers.

Earlier today, Target TGT shared a quarterly earnings report that generally surpassed analysts’ expectations, but the company’s cautious tone about consumer confidence splashed some cold water on the numbers. Comparable sales were flat year-over-year as customers continued to shy away from “discretionary” purchases.  

“The customer is under pressure,” a TGT executive told reporters this morning, CNBC reported. Inflation and general economic uncertainty are making consumers more careful about their purchases.

Up next: Walmart WMT, which reports Thursday morning. Judging from how retail earnings have progressed so far, with customers focused more on staples, WMT might get a tailwind from its large grocery business.

As investors try to decipher what the latest Q1 store results say about the path of the economy, they’ll be keeping a nervous watch on Washington, D.C., as debt ceiling negotiations between the White House and Congress approach a potential June default.

On the positive side, retail bank shares climbed this morning. The market is still hypersensitive to this sector. However, the Dallas Fed survey released earlier this week showed more signs of credit tightening and loan demand shrinking, an ominous development for banks.

Morning rush

• The 10-year Treasury note yield (TNX) is down 2 basis points at 3.52%.
• The U.S. Dollar Index ($DXY) climbed to 102.9, the highest since late March.
• The Cboe Volatility Index® (VIX) futures slipped to 17.67.
• WTI Crude Oil (/CL) inched up to $71.07 per barrel.

Just In

Early Wednesday, the Census Bureau reported U.S. housing starts rose to a seasonally adjusted annual rate of 1.401 million in April, but the March data were revised down. Housing starts, which measure residential construction but also gauge consumer confidence and overall economic health, were expected to come in around 1.405 million, according to Briefing.com.

Building permits, a longer-view measure of housing demand, were issued at a seasonally adjusted annual rate of 1.41 million during April, below a Briefing.com consensus of 1.438 million. It was the second straight monthly decline.

Housing activity plunged over the past year as the Federal Reserve raised interest rates, making home mortgages an increasingly costly proposition.

Stocks in the Spotlight

Target (TGT) reported net earnings per share (EPS) of $2.05, down from $2.19 during the same quarter a year earlier but above Wall Street expectations. Revenue totaled $25.3 billion, just barely above the average analyst estimate. The company maintained its outlook.

In its press release, TGT referred to a “very challenging environment” and “ongoing softness in discretionary categories.” The company plans to stress affordability and said its inventory position is healthy. Shares of the stock barely moved ahead of the bell.

Target shares, like those of many large retailers, are down from 2022 highs amid slowing sales and higher costs for goods. The company’s stock was up slightly over 5% so far this year but down 37% from a peak near $250 in April 2022.

Another retailer reporting Wednesday, TJX Companies (TJX), saw shares come under pressure, too, in premarket trading, despite earnings per share topping analysts’ estimates. A slight revenue miss appeared to weigh. Foot Locker (FL) reports Friday and Kohl’s Corp. (KSS) is scheduled to report May 24.

Investors also will receive another read on the tech sector with Cisco Systems (CSCO), which will report results after today’s market close. The software and cloud computing company is expected to post EPS of about 87 cents, compared with 78 cents a year earlier. CSCO is often seen as a proxy for info tech sector health, as it has a vast footprint in the tech world across geographies.

Tesla (TSLA) shares bounced slightly in premarket trading, possibly reflecting optimism after yesterday’s shareholders meeting.

Eye on the Fed

The probability of a June rate pause is holding around 78%, according to the CME FedWatch Tool. The tool also prices in about a 50% chance the Federal Reserve will lower rates in September and a 97% chance of rates being below current levels by the end of this year.

Comments from Fed leaders, as always, hold potential to move markets the rest of this week. Many Fed officials appear determined to quash any notions that the central bank could be nearing a “pivot” that would be followed by a rate cut. On Monday, Atlanta Fed president Raphael Bostic told CNBC he doesn’t expect any interest rate cuts at least through 2023, even if the economy slips into recession.

“For me, inflation is job No. 1. We’ve got to get back to our target,” Bostic said.

The speaking slate this week includes Fed Governor Philip N. Jefferson, who will appear Thursday at an insurance forum in Washington, D.C., as well as Fed Vice Chair for Supervision Michael S. Barr, who will address the Senate Committee on Banking, Housing, and Urban Affairs, also Thursday.

At 11 a.m. Friday, Fed Chair Jerome Powell and former Fed Chair Ben Bernanke will appear together at a Washington, D.C., research conference.

What to Watch

Debt ceiling negotiations will remain in focus after talks on Tuesday between President Biden and Congressional leaders appeared to generate some progress, according to news reports. However, House Speaker Kevin McCarthy told reporters the sides remain “far apart.” Also Tuesday, the White House said that it would cancel the second part of the president’s upcoming international trip, citing the state of the negotiations.

Market concerns over a potential default have ticked higher this week, with the Cboe Volatility Index® (VIX) jumping Tuesday near 18—the highest level in nearly two weeks. The VIX is up from an 18-month low around 15.78 posted in late April.

Also worth checking today is the Energy Information Administration’s (EIA) weekly U.S. crude oil inventory report, scheduled for 10:30 a.m. ET. A week ago, EIA reported a build of 2.95 million barrels. WTI crude oil futures are hovering just above $70 per barrel, down about 15% from five-month highs above $83 in mid-April, suggesting U.S. motorists may catch some relief at the pump with the summer driving season just around the corner.

CHART OF THE DAY: DOLLAR BUCKS UP. Rumors of the “demise” of the almighty greenback appear to be greatly exaggerated. The U.S. Dollar Index ($DXY—candles), a measure of the dollar against a basket including the euro and other currencies, recently bounced off support around 101.00 and has been climbing for over a week, likely reflecting beliefs the Fed won’t be softening its inflation-slaying stance anytime soon. Continued strength could push the index near March highs, but the 104.00 reading poses stiff, long-term resistance. Data sources: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Household debt back at pre-COVID levels: The New York Fed’s latest household debt report showed total balances have ballooned above levels from just before the pandemic, topping $17 trillion for the first time. Mortgage balances rose “modestly” by the end of March, and Q1 credit balances were flat at $986 billion, the bank said. However, auto loan balances rose by $10 billion (they typically decline in the first quarter), and student loan balances rose a little to $1.60 trillion. Other balances, which include retail cards and other consumer loans, increased by $5 billion. 

Delinquencies on the rise, too: The Fed also reported the delinquency transition rate for credit cards and auto loans increased by 0.6 and 0.2 percentage points, respectively, approaching or surpassing pre-pandemic levels. As of May 10, Creditcards.com reported that the average new credit card interest rate stood at 20.68%, a new all-time record and up 4.5 percentage points since March 22. 

From Lithium to… salt? Could cheaper batteries for electric vehicles (EVs), mobile phones and laptops be on the way? MIT Technology Review reported last week sodium-ion battery technology may eventually replace dominant Lithium-ion battery technology in some EVs as soon as the end of the year. The publication notes that “sodium-based batteries have recently been cramming more energy into a smaller package. In 2022, the energy density of sodium-ion batteries was right around where some lower-end lithium-ion batteries were a decade ago—when early commercial EVs like the Tesla Roadster had already hit the road.” Chinese automakers are already experimenting sodium-ion in certain models, the publication adds.

Calendar

May 18: April Existing Home Sales and Leading Economic Indicators, and expected earnings from Walmart (WMT).

May 19: Expected earnings from Deere (DE) and Foot Locker (FL).

May 22: No major earnings or data expected.

May 23: April New Home Sales and expected earnings from AutoZone (AZO), and Dick’s Sporting Goods (DKS).

May 24: No major earnings or data expected.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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