Crown the U.S. Consumer Again: Target, Lowe’s Beat; Fed Minutes Awaited

The U.S. consumer is back in focus today as Target and Lowe’s both rise double-digits on earnings beats. More retail earnings on tap later, along with Fed minutes. wild ride through Italy, China, U.K.
5 min read
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Key Takeaways

  • Earnings from Target and Lowe’s exceed expectations

  • Negative yield on just-issued 30-year German bond
  • Fed minutes awaited and bond yields pop back up slightly

(Wednesday Market Open) Did we mention how the consumer is king?

It’s worth beating that drum again after more evidence rolled in Wednesday from Target (TGT) and Lowe’s (LOW). Both big-box stores surpassed the Street’s estimates, reinforcing how resilient the U.S. consumer continues to be in spite of global economic turbulence.

We now have a triple whammy as the shoppers’ troika of Walmart (WMT), Amazon (AMZN), and now Target (TGT) all did well in their most recent quarters. Shares of LOW and TGT both rose double-digits in pre-market trading, and their strength appeared to transmit over to the rest of the market.

Bond prices, which had risen on Tuesday, pulled back a little by Wednesday morning. The 10-year yield rose to 1.59%, but Fed minutes later today might help determine where yields go from here.

Looking more closely at TGT and LOW, both beat third-party consensus estimates, and TGT raised its full-year estimates. Same-store sales at TGT climbed 3.4%, which also surpassed expectations on Wall Street. If you want to get picky, TGT’s digital sales rose 34%, down from a 42% increase the prior quarter.

LOW maintained its guidance and saw same-store sales grow 2.3%, better than the 1.9% analysts had expected. Some analysts quoted in the media Wednesday gave credit for LOW’s success to changes implemented by the company’s new CEO.

What’s leading to all of this strength among consumers? It could be record-low unemployment and rising wages. It’s also worth noting that even as people seem reluctant to spend on big-ticket items like homes and cars—as evidenced by recent auto sales and housing data— they’re apparently cramming the aisles at places like TGT and WMT where pricing tends to be competitive for everyday products.

It also might offer evidence that the tariff battle isn’t having a huge impact on consumer sentiment—yet. The latest University of Michigan consumer sentiment report wasn’t so hot, and it’s worth monitoring to see if that gets worse as the trade war goes on without much sign of a break. New tariffs scheduled to take effect soon could have an impact on many of the products sold at big-box retailers.

Overseas, Germany auctioned off a set of 30-year bonds at a record-low yield of negative 0.11%. Demand appeared tepid for the new offering, which could help establish just how much appetite investors have for long-term negative yields. Closely followed German 10-year bond yields rose slightly Wednesday, as Germany remains in the spotlight amid talk of possible fiscal stimulus.

Up Next: Fed Minutes, Jackson Hole

With so much of the week’s news concentrated over the next few days, there’s an impression that the early part of this week might have been the calm before the storm. Today we got great earnings from TGT and LOW, but earnings on Monday and Tuesday were generally mixed and didn’t give a lot of direction. After the closing bell today, we may learn a bit more about the retail scene as Nordstrom (JWN) and L Brands (LB) are scheduled to report. 

This week’s economic data slate is about as thin as it gets, so the next few days of earnings and the Fed’s Jackson Hole symposium could end up telling the tale. Fed Chair Jerome Powell is scheduled to speak Friday morning (see more below).

There’s growing hope that Powell will say something dovish, but keep in mind that he’s not necessarily the most dovish Fed chair we’ve had. In addition, it’s worth remembering that often when Powell speaks, the market goes down. That’s not a prediction, just a reminder. Last month, for instance, stocks flagged after he called the rate cut a “mid-cycle adjustment.”

Before Powell takes the podium, Fed minutes from last month’s meeting are due later today. As we noted earlier this week, the minutes might provide more insight into the thinking behind the Fed’s 25-basis point rate cut and into why two voting members dissented. What did they see in the economy that led them to vote against cutting rates? Maybe we’ll find out later today.

Speaking of the economy, one metric worth considering as a barometer is crude, which has bounced around in the mid-$50s per barrel. This morning brings the weekly U.S. stockpiles report. Lately, crude supplies have been slightly above the five-year average, with a couple of surprising upticks recently. We’ll see if that trend continues. Gasoline demand has been pretty high in the U.S., often a bullish economic indicator. However, gasoline supplies are above the five-year average. 

Another metric is the dollar index, which remains near 2019 highs above 98. This could reflect investor faith that the U.S. economy can weather any foreign storms, but it’s tough for big U.S. companies trying to make profits overseas.

Bonds Were in Control Tuesday

Stocks went south and bonds traveled north Tuesday for the first time in a few days. The downward move for the S&P 500 Index (SPX) as 10-year yields sank reinforced ideas that stocks are following the bond market’s lead. When bonds move up and yields fall, it seems to remind investors of global weakness worries that plagued markets earlier this month.

The 10-year yield finished Tuesday at around 1.55%, maintaining its premium to the two-year yield but below recent highs. Hopes for more economic stimulus appeared to help bonds, analysts said. If any of the potential German stimulus involves buying bonds, that could put more pressure on yields not just in Europe but also in the U.S. Though 1.55% (up to 1.59% early Wednesday) is near historic lows, just the fact that U.S. yields are positive could be drawing investors from overseas to snap up Treasuries.

Meanwhile, the U.S. 30-year yield continues to hover just above 2%, a level to consider watching. If it falls below 2%, that might be a psychological blow. 

The other reason stocks might have edged lower Tuesday could be their early failure to take out resistance at the 2935-2940 level for the SPX that was just above Tuesday’s open. Some analysts see that as an important band of resistance. If stocks can push through there at some point, more buyers might show up. Until then, the market appears to remain pretty range-bound.

Cyclical sectors, which had rallied Friday and Monday, stepped back on Tuesday. Technology might have been hurt by more reports of government investigations into the industry, but Materials and Financials were among the day’s biggest losers while Utilities had some of the lightest losses of the day. 

Bucking the trend was Consumer Discretionary, which appeared to get a decent lift from strong Home Depot (HD) results. It spent most of the day higher, but got dragged down with everything else as selling accelerated late in the session.

As most of the stock market lost its footing Tuesday, volatility only clawed back slightly. VIX took another step down early Wednesday to fall below 17 again. It’s possible to view this as a signal that there’s not too much fear ahead, though VIX remains elevated from last month’s lows below 12.

FIGURE 1:  COMMODITY CRUNCH: Two of the more heavily-used commodities, copper (candlestick) and natural gas (purple line), are languishing near recent long-term lows. Declining industrial demand appears to have copper on the ropes, while natural gas is under pressure from heavy production, analysts say. Data Sources: CME Group. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

“Smaller Dose” From Powell? At the Fed’s Jackson Hole symposium a year ago, 10-year Treasury yields were nearing 3% and people were talking about whether they’d ultimately go to 4.5% or 5% within two years. Speaking then, Fed Chairman Jerome Powell didn’t give investors much reason to doubt that rates would keep heading up, defending the Fed’s policy of gradual rate increases and pushing back on criticism that it jeopardized economic growth. The question going into this week’s Jackson Hole gathering is how much Powell and his team are willing to ease rates, and how much clarity investors could get from Powell when he speaks Friday. 

One hint of Powell’s thinking potentially is in last year’s Jackson Hole speech, and it could play into the Fed’s strategy going forward. He said back then, “When you are uncertain about the effects of your actions, you should move conservatively. In other words, when unsure of the potency of a medicine, start with a somewhat smaller dose.” If there’s anything certain about today’s rate environment and global economy, it’s that it’s uncertain. Whether that means a “smaller dose” of rate easing is up for debate.

Pay Up: Digital payment stocks got some love from analysts Tuesday with both Square (SQ) and Paypal (PYPL) stepping into the spotlight. Nomura Instinet said SQ’s Cash App saw its highest monthly download volume ever in July with 2.4 million, while Rosenblatt called PYPL a “steady and strong grower.” Both stocks only appeared to derive a little traction from the news, but these stocks, along with credit card companies, would all appear in line to possibly benefit from the strong retail earnings that keep coming down the pike.

Credit card and mobile payment companies have had mixed years on the charts, so there’s no one way to characterize their stock performance so far in 2019. As cash usage decreases in many markets globally and some retailers go cashless, the digital payments space has been eyed by many analysts as one that could continue to grow for some time. Even though analysts appear to be widely optimistic about the space, an overriding concern is valuation and that some companies will likely need to execute flawlessly to deliver on investor expectations. Forward P/E ratios for many companies remain high.

Open House: Existing home sales for July are out this morning, one day after Home Depot (HD) delivered strong earnings. Remember, HD is sometimes seen as a barometer for the housing market. At a time like now when new home demand is struggling despite low mortgage rates, people who buy existing homes might be the ones more likely to put a little work into them with supplies from stores like HD and rival Lowe’s (LOW), which reported today. However, existing home sales haven’t been exactly cruising along, either, falling more than 2% year-over-year in June as supplies of more affordable homes continue to lag, observed then. 

One question is what, if anything, could possibly stop the climb in existing home prices. The median home price has risen 88 months in a row heading into July, to a record high of nearly $286,000. One thing that possibly could derail the trend is economic uncertainty. As one analyst observed, people who fear possible economic softness aren’t so likely to put money into a home.

Good Trading,



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This week's economic calendar. Source:

Key Takeaways

  • Earnings from Target and Lowe’s exceed expectations

  • Negative yield on just-issued 30-year German bond
  • Fed minutes awaited and bond yields pop back up slightly

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