Target Earnings Are Latest To Show Cautious Consumer, But Optimism Rises On Debt Ceiling – Target (NYSE:TGT), Home Depot (NYSE:HD)

(Wednesday market open) Consumer spending is losing momentum under pressure from rising prices and economic uncertainty. That’s suggested by the results from major retailers so far this week, although stocks were generally higher this morning on hopes of a debt ceiling solution.

Home Depot HD Tuesday’s quarterly earnings miss initially set a somber tone in the late-stage earnings season that involved several large US retailers.

Early today, Goal TGT released a quarterly earnings report that generally beat analysts’ expectations, but the company’s cautious tone on consumer confidence left the numbers somewhat cold. 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 causing consumers to become more cautious when shopping.

Next: Walmart WMT, which reported on Thursday morning. Judging by the past trajectory of retail earnings, as customers focus more on staples, WMT could get a tailwind from its large grocery store.

As investors try to decipher what the latest first-quarter earnings report says about the economy’s trajectory, they will be keeping an eye on Washington, DC as debt ceiling negotiations between the White House and Congress near a potential default in June .

On a positive note, retail bank stocks are up this morning. The market is still overly sensitive to this sector. However, the Dallas Fed survey released earlier this week showed further signs of a credit crunch and a slowdown in credit demand, an ominous development for banks.

morning rush

• The yield on 10-year Treasury bills (TNX) is down 2 basis points to 3.52%.
• The US Dollar Index ($DXY) climbed to 102.9, its highest level since late March.
• The Cboe Volatility Index® (VIX) futures slipped to 17.67.
• WTI Crude Oil (/CL) edged up to $71.07 a barrel.

Just arrived

Early Wednesday, the Census Bureau reported that US housing starts rose to a seasonally adjusted annualized rate of 1.401 million in April, but data for March was revised down. According to Briefing.com, housing starts are expected, which measures housing construction, but also measures consumer confidence and the general state of the economy.

Building permits, a longer-term measure of housing demand, were granted at a seasonally adjusted annual rate of 1.41 million in April, below a Briefing.com consensus of 1.438 million. It was the second monthly decline in a row.

Residential real estate activity fell last year as the Federal Reserve hiked interest rates, making home mortgages increasingly expensive.

Stocks in the spotlight

Target (TGT) reported net earnings per share (EPS) of $2.05, down from $2.19 in the year-ago quarter but ahead of Wall Street expectations. Revenue came in at $25.3 billion, just above the average analyst estimate. The company maintained its outlook.

In its press release, TGT cited a “very challenging environment” and “continued weakness in discretionary categories.” The company wants to prioritize affordability and said its inventories are healthy. Shares of the stock barely moved before the bell.

Target stocks, like those of many large retailers, are down from their 2022 highs on the back of declining sales and higher cost of goods. The company’s shares are up a little over 5% so far this year, but have fallen 37% after peaking at $250 in April 2022.

Another retailer reported on Wednesday, TJX company (TJX) shares also came under pressure in premarket trading, despite earnings per share beating analyst estimates. A slight loss of sales seemed to be a burden. Foot Locker (FL) reported Friday and Kohl’s Corp. (KSS) is scheduled to report on May 24th.

Investors also get additional reading on the technology sector Cisco systems (CSCO), which will release its earnings results after the market close today. The software and cloud computing company is expected to report earnings per share of about 87 cents, compared to 78 cents a year ago. CSCO is often seen as a proxy for the health of the information technology sector as it has a large presence in the technology world across all regions.

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

Keep an eye on the Fed

The probability of an interest rate pause in June is therefore around 78% CME FedWatch tool. The tool also factors in a roughly 50 percent chance that the Federal Reserve will cut rates in September and a 97 percent chance that rates will be below current levels by the end of this year.

As always, Fed leaders’ comments have the potential to move markets for the rest of this week. Many Fed officials seem intent on dismissing any notions that the central bank may be close to a “pivot” followed by a rate cut. On Monday, Atlanta Fed President Raphael Bostic told CNBC he doesn’t expect any rate cuts until at least 2023, even if the economy slips into recession.

“For me, inflation is task No. 1. We have to get back to our goal,” Bostic said.

This week’s speakers include Fed Governor Philip N. Jefferson, who will address an insurance forum in Washington, DC on Thursday, and Fed Vice Chairman for Oversight Michael S. Barr, who will address the Senate Committee on Banking, Housing, and Urban Affairs, also Thursday.

Fed Chair Jerome Powell and former Fed Chair Ben Bernanke will jointly address a research conference in Washington, DC at 11 a.m. Friday.

What to see

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

Market concerns over a possible default increased this week Cboe Volatility Index® (VIX) jumped near 18 on Tuesday – the highest in almost two weeks. The VIX has risen from an 18-month low of around 15.78 in late April.

This is also worth a look today energy information management (EIA) weekly US crude inventory report scheduled for 10:30 am ET. A week ago, EIA reported an increase of 2.95 million barrels. WTI crude oil futures are trading at just over $70 a barrel, about 15% below the five-month high of over $83 in mid-April.

thinking cap

Ideas to think about while trading or investing

Household debt back to pre-COVID levels: The New York Fed’s most recent report on household debt showed that total balances rose above pre-pandemic levels, topping the $17 trillion mark for the first time. Mortgage balances rose “moderately” through the end of March and first-quarter loan balances were flat at $986 billion, the bank said. However, auto loan balances increased by $10 billion (they typically decline in the first quarter) and student loan balances increased slightly to $1.60 trillion. Other balances, which include retail cards and other consumer loans, rose $5 billion.

Payment defaults are also increasing: The Fed also reported that the delinquency rate for credit cards and auto loans rose 0.6 and 0.2 percentage points, respectively, approaching or exceeding pre-pandemic levels. On May 10, Creditcards.com reported that the average interest rate on new credit cards was 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), cellphones and laptops be on the way? MIT Technology Review As reported last week, sodium-ion battery technology could replace the dominant lithium-ion battery technology in some electric vehicles by the end of the year. The publication states that “recently, sodium batteries are packing more energy into a smaller package.” In 2022, the energy density of sodium-ion batteries was roughly at the level of some lower-end lithium-ion batteries a decade ago — when early commercial electric vehicles like the Tesla Roadster were already on the road.” Chinese automakers are already experimenting with sodium ions in certain models, the publication said.

calendar

May 18th: April inventory home sales and leading indicators for the economy and expected earnings from Walmart (WMT).

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

May 22: No major gains or data expected.

23. May: April new home sales and expected earnings from AutoZone (AZO) and Dick’s Sporting Goods (DKS).

May 24th: No major gains or data expected.

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

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