Mixed Earnings Reports From Lowe's And Target Keep Retailers In The Forefront

(Wednesday Market Open Investors may be ready to take some profits today after the S&P 500® index (SPX) has now rallied more than 22% from June lows. In premarket action, S&P 500 futures were already down 0.84%. 

Potential Market Movers

But today’s activity may not be all about profit-taking. Investors seemed spooked by the latest U.K. inflation numbers that topped 10%. Britain’s Consumer Price Index (CPI) grew at 10.1% year-over-year which above the 9.8% forecast. It’s news that could make today’s FOMC meeting minutes release a little more interesting as investors could finally be willing to take Fed members’ recent hawkish comments a little more seriously.

Despite so many similarities with the U.S. economy, the U.K. is facing somewhat different inflationary pressures. While both countries are dealing with a lack of supply for many products and backed-up supply chains, Britain is facing a steep energy crisis due to the Russian-Ukraine war that the U.S. is not.

Nonetheless, U.S. Treasury yields were higher before the opening bell. The 2-year Treasury yield rose 10 basis points to 3.34% and the 10-year Treasury yield (TNX) jumped 8 basis points to 2.89% suggesting that there might be something to the market’s inflation concerns.

The U.S. retail sales report also came out this morning showing that July sales didn’t grow at all with a print of 0.0%. Analysts had forecasted growth of 0.1%. However, there are layers to this report that provide a clearer picture. Core retail sales that exclude automobiles rose 0.4%, well above the forecast of -0.1%. Further, the control group number that excludes automobiles, gasoline, and home improvement grew 0.8%, topping the forecasted 0.6%.

Meanwhile, a big retail earnings week continues. Lowe’s LOW beat earnings estimates despite missing revenues and then warned that future sales estimates would likely be at the bottom end of its range. However, the stock rallied more than 3% in premarket trading.

Target TGT missed on top and bottom-line numbers due to the need to unload excess inventory at sale prices. The company said that it still has more inventory it will need to discount, but it’s now a short-term problem and Target slightly raised its longer-term forecast. However, investors appeared unconvinced as TGT’s shares were down 2.66% premarket.

TJX Companies TJX topped earnings estimates despite missing on revenues, but sales fell more than expected. The company attributed its lower revenues to inflation cutting into customer buying habits. TJX fell 1.58% ahead of the opening bell.

Moving over to technology, chip maker Analog Devices ADI beat on top- and bottom-line numbers but fell 1.98% in the premarket session. The company reported strong demand but hedged by expressing concern that macroeconomic uncertainty has begun to cut into orders, but its order backlog is still growing.  

After the market close, tech bellwether Cisco CSCO reports earnings. 

Reviewing the Market Minutes

After failing to maintain a break above the 4,300 level, the S&P 500® index (SPX) ticked 0.01% lower by the close. The Nasdaq ($COMP) decreased 0.43% after finding resistance around the 13,100 mark. The Dow Jones Industrial Average ($DJI) was the only major index to close higher—rising 0.62%.

Despite the relatively flat performance from the major indexes, retailers Walmart WMT and Home Depot HD were able to rally 5.1% and 4.1% respectively on better-than-expected earnings reports. The two stocks helped to the lift the Dow Jones U.S. Retailer Index 2.03% higher. They also helped push the consumer discretionary and consumer staples sectors to the No. 1 and 2 spots for the day. Health care, energy, technology, and real estate were the only sectors to finish the day in the red.

Retailers also got some help from stocks that Briefing.com said have high short interest. Bed, Bath and Beyond BBBY rocketed 29.1%, Blue Apron APRN climbed 16.2%, and GameStop GME rallied 6.3%. GME was one of the original meme stocks in 2020 and S&P Global Market Intelligence said last week that BBBY was likely benefiting from a short squeeze.

July housing starts and building permits continued to contract in July reflecting ongoing weakness in the housing market. However, the PHLX Housing Sector Index (HGX) rose 0.30% despite the news. 

CHART OF THE DAY: CONGESTION. The S&P 500 (SPX—candlesticks) tested the 4,300 level on Tuesday, which has been a significant level of support and resistance over the previous 10 months. If resistance holds, the benchmark index may bounce between the 4,300 and 4,150 levels because it’s an area of congestion for the index. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

TIGHTEN THE BELT: As the Federal Reserve started raising interest rates this year, it also started quantitative tightening (QT). This means that the Fed is reducing the number of Treasury and mortgage-backed security bonds it owns, which in turn “tightens” the money supply. In March, the Fed’s balance sheet had $9 trillion in bonds and has since allowed $45 billion of these to mature off its balance sheet without replacement. Starting September 1, the Fed plans to crank up this number to $90 billion.

With the bond market losing a big buyer, there’s concern that yields will go even higher next month, but nobody really knows what’s going to happen. The U.S. Treasury will have to rely on the money markets to find bond buyers, and bond buyers may demand more for their money, causing yields to rise.  

NOT SO TIGHT: However, the U.S. Treasury is expected to continue to cut the size of its auctions in the third quarter. While it continues to issue bonds for all maturities, it’s cutting the number of bonds sold. According to the Quarterly Refunding Statement of Assistant Secretary for Financial Markets Josh Frost, the plan over the next quarter is to incrementally reduce the size of each of the 2-, 3-, 5-, and 7-year note auctions by $1 billion per month.  The size of the 2-, 3-, 5-, and 7-year note auctions will decrease by $3 billion each by the end of October.

Additionally, the Treasury plans to reduce $1 billion in both the new and reopened 10-year note auction sizes and to new and reopened 30-year bond auction sizes starting this month. 

Finally, the new and reopened 20-year bond auction sizes will be reduced by $2 billion each.

The reduction in the size of these auctions should help rates remain relatively stable as supply falls to meet lower demand from the Fed.

STRETCHED TIGHT: According to Edmunds, the average monthly car payment is now $702—the highest on record. That number doesn’t account for insurance, gas, maintenance, repairs, or parking. The average term of a car loan is 70.4 months, just two months shy of six years.

The reason for the rise in the payment is that the average cost for a new car in July was $45,869 according to J.D. Power/LMC Automotive. While that’s lower than the previous record of $45,988 set in June, higher lending rates are increasing the size of car payments. Edmunds says the average car loan rate is 5.5% compared to the previous year of 4.5%.

Notable Calendar Items

Aug 18: Philadelphia Fed Manufacturing Index, Existing Home Sales, and earnings from Estee Lauder EL, Applied Materials AMAT, NetEase NTES, and Ross Stores ROST

Aug 19: Earnings from Deere DE, Foot Locker FL, and Buckle BKE

Aug 22: Earnings from Palo Alto Networks PANW

Aug 23: New home sales and earnings from Intuit INTU, Medtronic MDT, Advance Auto Parts AAP, Dick’s Sporting Goods DKS, and Toll Brothers TOL

Aug 24: Durable goods orders, Pending home sales and earnings from Nvidia NVDA, Salesforece.com CRM, Snowflake SNOW, and Autodesk ADSK

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