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Consumer in Focus: Get Ready For Lowe’s, Home Depot Earnings, and CPI

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August 15, 2016

(Monday Pre-Market) As the summer doldrums roll on, a nap may seem tempting. But stay awake this coming week for a host of data that may give more insight into U.S. consumers.

Friday’s retail sales report for July, which showed no gain in contrast with expectations for a 0.4% rise, was something of a puzzler, especially after two-consecutive months of strong employment growth and solid earnings from retailers like Macy’s (M), Kohl’s (KSS) and Nordstrom (JWN) earlier in the week. The retail sales data showed consumers spending more on automobiles, but not on a whole lot else.

That’s not the last word on consumer spending, however, because this coming week delivers earnings from Home Depot (HD) and Lowe’s (LOW). Despite retail sales flaming out, there’s a lot of other evidence that U.S. consumers continue to step up to the plate, and HD and LOW can often serve as good synthetic measures of consumer confidence.

Why is this? Because when people feel confident about their jobs, they’re more likely to add a new bathroom to their home or upgrade their kitchen, and that can often mean a trip to HD or LOW. How these two companies perform, and, more importantly, what their executives say on their conference calls about the months ahead, could answer more questions about the state of the consumer. HD reports before Tuesday’s open, and LOW reports before the open on Wednesday. Consensus earnings per share for HD is $1.97, up from $1.71 a year ago, and for LOW consensus EPS is $1.41, up from $1.20 a year earlier, according to Briefing.com.

Also next week, be on the lookout for the July Consumer Price Index (CPI), which comes out Tuesday before the market open. Inflation has continued to look muted lately, not reaching the Fed’s target of 2%. Both CPI and core CPI rose 0.2% in June from the previous month, a little below expectations, but the fourth-straight month of growth. For the 12 months through June, CPI was up just 1%. Like the reports from LOW and HD, the CPI data could be another chapter in the consumer story.

Though July retail sales just came out, it’s not too early to look ahead to the August retail sales report for more insight, because that report is likely to reflect back-to-school shopping. It’s back to school season, and everyone is out buying pens and pencils and compasses. Keep an eye on the traditional brick-and-mortar stores, because they tend to perform well during back-to-school season as parents and kids go out shopping and decide whether they want the red folder or the blue one and other big decisions. Let’s see how brick-and-mortar stores perform vs. online retailers.

Speaking of online retailers, the most interesting earnings report last week may have come from Chinese e-retailer Alibaba (BABA). That’s because on the company’s call, its executives talked about the health of Chinese consumers, a big point of concern for the market overall. The Chinese consumer is doing well, the company said. And the retail earnings from big U.S. companies last week seem to show that U.S. consumers are also in good shape.

Back in the U.S., Treasury yields took a step back early Friday as the retail sales report seemed to indicate lower chances of a near-term rate hike. By midday Friday, the 10-year Treasury yield was back below 1.5%, quite a turn-around after the yield had risen to nearly 1.6% earlier this week. There’s now just a 12% chance of a rate hike next month, according to futures prices, and about a 40% chance of a hike in December. Many have discounted the possibility of any Fed action at its Nov. 2 meeting, as it comes directly ahead of the U.S. Presidential election. So if the Fed wants to act, it appears to have two windows: Next month or December.

As of Friday, the Atlanta Fed still anticipated 3.7% economic growth in Q3, but could that go lower if economic data keeps being so choppy? Perhaps. Over the last few weeks, there’s been a potpourri of strong earnings, weak gross domestic product (GDP), strong jobs growth, and a mixed retail sales picture. With all these ups and downs, it gets a bit difficult to figure out the true direction of the economy.

Oil has been pushing and pulling the overall market in both directions lately, with the supply-and-demand picture seemingly changing each day. Late last week, oil jumped above $44, and appears to have made a good comeback from below $40 earlier this month. The $40 mark remains a solid support level, with $46 marking an area of technical resistance. The options market shows some bullish bets on oil rising above $46 and again challenging $50, but the $40 to $50 level seems to be a well-established range. Oil’s correlation with stocks is now in the low-70’s from a percentage standpoint, down from the mid-90’s early this year. We’ll see if that becomes highly correlated again.

Where is resistance for the S&P 500 Index (SPX), which again posted new all-time highs last week? The index appeared to be having some difficulty breaking above the 2186 level as of late last week, but 2200 is an important psychological number.

S&P 500:

FIGURE 1: TESTING RESISTANCE.

The S&P 500 (SPX), plotted through midday Friday on the TD Ameritrade thinkorswim platform, continued to struggle a bit to penetrate 2186 resistance. Above that there’s resistance at 2200. . Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Dollar Shredding: After Friday’s weak economic reports from the U.S. government, including a below-consensus retail sales figure for July and a falling Producer Price Index, the U.S. dollar edged lower vs. competing currencies. By midday Friday, the dollar index was down about 0.4% to 95.54, and earlier traded at its lowest level in more than a week. The yen and euro advanced, but the pound continued its recent poor performance that’s brought it to 30-year lows. The yen seemed to benefit from its position as a safe haven, analysts said, and remains sharply up from the multi-year lows it posted vs. the dollar late last year. Despite Friday’s losses, on the whole the greenback has continued to fare pretty well against other currencies, as it has for most of 2015 and 2016. 

Brexit Concerns Fade But Election Worries Rise: Consumer sentiment inched upward in early August due to more favorable prospects for the overall economy, which offset a small pullback in personal finances, the University of Michigan said Friday in its preliminary sentiment report for August. The headline figure rose slightly to 90.4, up from 90.0 in July. Concerns about Brexit have faded, the University said in a press release Friday, but there are rising references to the outcome of the Presidential election as a source of concern about future economic prospects. “Overall, the data remains consistent with real personal consumption expenditures improving at an annual rate of 2.6% through mid 2017, with new and existing home sales also benefitting from low mortgage rates,” said University of Michigan chief economist Richard Curtin, quoted in the press release.

Get Ready: Yellen Speech Not Far Off: Maybe Fed Chair Janet Yellen can make some sense out of all this summer’s up-and-down data. Yellen hasn’t given any major speeches about the economy since early June, but she’ll get a chance on Friday, Aug. 26, when she’s scheduled to speak at the Fed conference in Jackson Hole, Wyoming. What she’ll say is a mystery, but perhaps she’ll address employment, inflation, earnings, and what all that may bring to bear on Fed officials as they prepare to gather for their September meeting, which takes place Sept. 20-21. Certainly things look different than they did the last time Yellen spoke, back when the market was still reeling from the disappointing May jobs report, and Yellen expressed concern about what she called a “slowdown in job creation.” Since then, job creation has leaped ahead, with the June and July reports showing job growth speeding along. Can Yellen explain how robust job growth, accompanied by weak GDP, strong earnings, and flat retail sales, all fit together? It will be interesting to find out.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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