Investors Digest the Fed's No-Surprises July Minutes

(Thursday Market Open) Stock futures pointed higher at the open after good reports on jobless claims and manufacturing, with fresh housing data and the latest rate signals from Fed members to come later in the day. Meanwhile, back at the mall, Kohl’s sees middle-income shoppers closing their wallets.  

Potential Market Movers

The market got enough positive news this morning to retry a rally as jobless claims declined, Philadelphia Fed manufacturing data turned upward, and investors took solace in the details from yesterday’s Federal Reserve’s July minutes.

We’ll get a chance to hear more Fed perspective later in the day from Kansas City Fed President Esther George and Minneapolis Fed President Neel Kashkari at separate appearances, plus key July existing home sales data from the National Association of Realtors is due out later this morning.

In a sign that the employment picture is holding steady, jobless claims fell slightly for the first time in three weeks to around 250,000, below expectations of 260,000 for the week ended August 13. Meanwhile, the Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook survey came in at 6.2 in August, better than the consensus expectation of -5 and significantly better than July’s -12.3 reading.

Sometimes, the best surprise for the market is no surprise at all as investors seemed to take a more extended but potentially moderated rate hike view from July’s Fed meeting in stride. S&P 500 futures were up 0.11% before the open, Dow Jones futures were up 0.04% and Nasdaq composite futures were up 0.10%. The 10-year Treasury yield was down slightly to 2.875%, while WTI crude oil was up 1.73% in early trading to $89.59 a barrel.

Kohl’s KSS shares lost 7.22% in premarket trading after once again trimming its annual earnings guidance, noting its core middle-income customer has been hit hard by rising inflation; Kohl’s says they are cutting back purchases of clothing, shoes and other discretionary items. Though previous quarterly results had beat estimates, the nation’s No. 2 department store chain ended plans in June to sell its business to Franchise Group, citing a deteriorating retail environment.

Cisco CSCO advanced 5.02% before the open after beating analysts’ estimates on fourth quarter results and providing a better-than-expected forecast for its year ahead.

Estee Lauder EL lost 1.25% in premarket trading after beating estimates on sales and earnings in the latest quarter but forecasting below-consensus earnings for the year due to impact from China’s on-again, off-again COVID-19 lockdowns.

Bed Bath & Beyond BBBY lost 14.4% before the open after investor Ryan Cohen filed notice that he intends to sell 7.78 million shares of the housewares chain. Reports in recent days indicated Cohen’s past purchases of call options had fueled buying in BBBY’s stock over the past few weeks.

Applied Materials AMAT and Ross Stores ROST will announce earnings after today’s close.

Reviewing the Market Minutes


The S&P 500® index (SPX) pulled back from its 200-day moving average on Wednesday, closing 0.72% lower. The benchmark index tested the long-term indicator on Tuesday but failed to mount any kind of attack yesterday. However, the Dow Jones Industrial Average ($DJI) broke above its 200-day average on Tuesday and was able to close above it yesterday despite decreasing 0.50%. The Nasdaq ($COMP) dropped 1.25% and remains less than 4% shy of its own 200-day average.

After starting the day lower, stocks mounted a short-lived rally after the FOMC July minutes were released. They showed that committee members favored smaller rate hikes in the future to give past hikes time to work but noted that members projected further hikes into 2023. Selling picked up shortly after the release.

However, the FOMC minutes failed to pull yields lower. Yields had risen in response to the United Kingdom reporting an astonishing year-over-year 10.1% increase in its Consumer Price Index (CPI). The high U.K. number had bond investors concerned that inflation could still be a problem for the Fed. The 2-year Treasury yield closed three basis points higher to 3.27% while the 10-year Treasury yield (TNX) rose seven basis points to 2.89%.

The energy sector was the only one to finish the day in the green. Energy stocks were boosted by rising oil prices. The WTI crude oil futures settled 2% higher at $87.97 per barrel.

The tech sector was weighed down by the semiconductor industry with Analog Devices ADI falling 5% after reporting that orders were moderating even though its backlog was still growing. The PHLX Semiconductor Index SOX tumbled 2.48%.

The Dow Jones U.S. Retail Index dropped 1.05% after Target TGT reported worse-than-expected earnings that caused the stock to drop 2.7%. However, TJX Companies TJX was able to swim upstream with a gain of 2.8% after finding a way to beat earnings estimates despite lower-than-expected revenues. 

CHART OF THE DAY: JUST IN TIME. The Retailers: Inventories to Sales Ratio FRED has sloped downward since 1995 because retailers haven’t had to keep as much inventory on hand due to “just in time” practices working smoothly along efficient global supply lines. This efficiency has helped the retail companies that make up the Dow Jones U.S. Retail Index ($DJUSRT—orange) to grow nearly 2,000% over the last three decades. But then came 2020. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

BREAKING THE CHAINS: The tremendous efficiency gains with the “just in time” inventory strategy worked well until the COVID-19 pandemic restrictions shut down the supply chains. As it turned out, sales went up as consumers moved more of their shopping online—though fewer products getting to market shrunk inventories even further and the inventory-to-sales ratio (above) plunged. The current rise in inventories vexing retailers is actually small when compared to 2019 levels.  

RETELLING RETAIL: Yesterday’s July U.S. retail sales report showed that 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 broader 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%.

The gains in retail sales excluding fuel sound similar to last week’s U.S. Consumer Price Index (CPI) results. Core CPI, which excludes food and fuel, rose 0.3% month-over-month, but it includes autos, so it’s not a complete comparison. The retail sales report isn’t adjusted for inflation, so it’s difficult to know if the increases outside of fuel and autos represents organic growth or growth driven at least in part by inflation.

SCHOOL CLOTHES: One group that you can parse out of the two reports is apparel. The CPI recorded a 0.1% decrease in apparel for July, while the retail sales report saw apparel sales increase 0.12%. So, even with discounting to clear inventories, much of apparel’s gain may have been due to inflation.

However, investors look forward, not backward which may be the reason that the Dow Jones U.S. Apparel Retailers Index rose 1.46% on Wednesday. Investors could be feeling that most of the inventory issues are behind the retailers. So, it’s likely the back-to-school shopping numbers could be the next big report.

Notable Calendar Items

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), (CRM), Snowflake (SNOW), and Autodesk (ADSK)

Aug 25: Gross Domestic Product (GDP) and earnings from Dollar General (DG), Workday (WDAY), Dollar Tree (DLTR), Ulta Beauty (ULTA), Burlington Stores (BURL), and Gap (GPS)

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

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