Catalyst Watch Podcast: Retail Sales, Walmart Earnings Preview

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Catalyst watch for the week of May 14. Seeking Alpha Managing News Editor Kim Khan says look out for retail sales, new home sales and existing home sales reports next week. Seeking Alpha Associate News Editor Kevin Curran gives investors a preview of what to expect when Walmart (NYSE:WMT) reports earnings. Hot topic: CPI, is the Fed’s plan working?

Julie Morgan: So Kim as usual, you’re starting off with macro today.

Kim Khan: Yeah. And so it’s a bit of a quiet week, I guess, compared to the weeks that we’ve had just recently. But that gives us a chance to kind of look into the more nitty gritty numbers that are about the economy itself about the mess about, you know, what the Fed impact is going to be.

So I highlight for next week are gonna be retail sales, that’s gonna be interesting to see how the consumer is holding up now, and whether or not that goes into a kind of hard landing or soft landing scenario, it’s got to be tough for the consumer, they’ve got to be feeling the pinch of these higher rates and tighter lending standards the being faced, and if they do, they can continue to bounce back and as expected, especially to be at 0.7% Rise compared to a 0.6% drop in the previous month.

That’s some encouragement for the market. That’s an outcome in this good news. It’s good news scenario, because they feel that these tightening cycle is, is over. We’ve also got housing starts and new home sales and existing home sales coming out next week.

And that’s another part of the economy that people tend seemed like it was a leading indicator of how much the economy was struggling, but maybe it could two could start to see some some growth again, that would be a very good sign and probably give a little support to the market.

Julie: But tell me this, how much of a difference could home sales make, especially since the interest rates are so high?

Kim: Well, I think that the anticipation that the market has the interest rates are going to drop and right now cuts priced in starting in September, and rates are seeing maybe as many as three quarter point rate cuts by the end of the year. That could really spur some activity in the groundbreaking of new homes. So the the this fourth forward looking activity of people saying okay, rates are gonna come down, people are gonna start to not just refinance, but maybe look started looking in for for to buy, that would help start activity right away because it takes a while lags, you know, for the home builders to actually get things going to put them on the market.

Julie: So Kevin, I know today we’re talking about earnings, of course and more retail, right?

Kevin Curran: Yeah, as Kim said, there’s, you know, retail sales data, but maybe just as important as a whole host of retailers during the week. Walmart’s going to be the headliner on Thursday, of course, just by sheer size, and its importance to the overall retail landscape across numerous categories.

But there’s also THX companies target Home Depot, Macy’s, footlocker and Bath and Bodyworks, among others that are catching my attention on the docket as far as retailers.

There’s also some interest in Chinese equities with Chinese search shine and perhaps nascent AI player, Baidu, in the mid week alongside the E commerce giant Alibaba and entertainment leader, Tencent music as well. So for anybody investing in Chinese equities, there’s a couple of interesting ones during the week, and a smattering of others, such as Deere and Cisco Systems, as well on the docket.

Julie: But of course, I know the big one that you’re going to talk about today is Walmart.

Kevin: Yeah. So Walmart, of course, is a huge indicator. It has a lot of insight into supply chains, retail spending, what types of categories people are spending on. And of course, it’s a favorite pick among people looking to play a little bit of defense with recessionary fears top of mind.

It’s also interesting to me that it’s the first quarter that we’ll be seeing if there’s any benefit to the bankruptcy of Bed Bath and Beyond, which still actually had about $5.3 billion in sales last year, and has enough share to donate to a number of companies.

And analysis from Oppenheimer recently said that a couple of home furnishings retailers as well as Walmart could benefit from that. So it’ll be interesting to see what the landscape looks like there.

I’ll also be keen to see if the company is doing any hiring or what their status is, with the job market being one of the largest employers in the United States. And, of course, you know, extremely low unemployment rate catching a lot of attention economically as of late.

Julie: So let’s talk about something that happened this week and kind of dig deeper into it. CPI. What are your thoughts?

Kim: Well, CPI came in pretty much right on the nose that economists predicted, which as a macro writer was really kind of boring for me, but everybody else seemed to love it. The market love the stocks took off right after and in nutrition, yields dropped.

So they’re kind of thinking as things are going to plan and that you know, the Fed can start looking ahead to what its next move is maybe the price again, as I said, I’ll pause the clock for the last very long rates cut starting in September, maybe rates down, which is, you know, 75 to 100 basis points by the end of the year. It’s interesting that that goes against the Fed that saying, we’re not going to do any cuts in 2023.

Powell was pretty clear on that in this press conference with the markets, saying the probably thinking that conditions will deteriorate enough quickly enough that they’ll be forced to move. The CPI itself did kind of paint a picture of, you know, overall things getting better for the consumer and as much as food prices, kind of stabilizing. And but there were some anomalies which I think Kevin will probably get deeper into, but like these car sales, we saw a spike up again.

Kevin: Yeah, that was interesting to me that the rebound and used car prices, they’re up 4.4% sequentially, after a really prolonged period of declines. The biggest thing is see what type of stocks move in relation to that because it obviously can go either way, whether it’s, you know, better gross profit per unit of a sale, or perhaps maybe slowing volumes, with higher interest rates and higher prices, it’s never good to generate demand for used autos.

As far as the food prices, it’s still pretty elevated, I would know, you know, we had sugar, carbonated drinks, frozen vegetables, all up double digits, egg prices are still up either been coming down, I should say, you know, they’ve been coming down after the avian flu really spiked them substantially last year. But it’s still, you know, significantly elevated above last year. And it’s reasonable for consumers to be a little bit concerned about how high food prices are generally speaking.

The other one that I was interested in, though, was airfares, which fell sequentially, even though we’re seeing higher fuel prices called out by a lot of airlines. So I’ll be interested to see what air fares look like in the peak summer season, because I would have expected them to edge up on the higher fuel costs.

Kim: Yeah, that was that was interesting, because I mean, that goes ties into what we’re talking about, like the strength of the consumer. I mean, it’d be if air fares are coming down, that does indicate that maybe, you know, this pent up demand is waning.

Another thing I find interesting is just kind of how we’re talking about it, like, you know, have this great market reaction of a inflation report that’s still firmly above 5%, both on headline and in core and core staying pretty sticky. Although there was one some, some bright spot when, with shelter coming down a bit, it’s kind of like we were near to this high inflation scenario that we’ve been in.

And now all of a sudden, anytime that we see like just a slight dip, or just things just not get much worse than than we expected. It’s a party for the markets.

Kevin: It’s interesting, like the vantage point to it’s like, oh, well, it wasn’t so bad sequentially. Whereas last year, we’re looking at how horrible it was year over year. So it’s interesting, which vantage point the markets wants to take on what timeline?

Kim: Exactly. It’s like, suddenly, you know, you’re rooting for a team that hasn’t won anything in years. And then they win two games back to back and everybody’s suddenly packing the stadium.

Julie: But if someone were listening to this, and they were to just ask you one question, is it working? Is what the Fed doing? Is it working? That’s it.

Kim: Yes. And no, can I qualify? I think that inflation is coming down for an unprecedented number of rate hikes. It’s a huge tightening cycle, but of heart of the economy is still humming along with the labor market. So that is what the Fed won’t want to see. It really does have to have some kind of economic regression for inflation to get down to 2%. area, we’re still talking about a big drop in inflation. But overall financial conditions are tightening. And that’s what they intend. So in that respect, yes, it is working.

Kevin: I think it is working to a degree. The question is, is the tightening of financial conditions going to create a larger crisis? I mean, we feel like we haven’t talked about it as much, because it seems like you know, we’ve kind of stabilized things.

But the collapse of multiple banks this year is no small potatoes, it’s something that we should have, you know, we should really take account of because there’s always something that pops up that we might not have seen these type of Black Swan things that can create huge problems if the Fed gets too tight.

I mean, I don’t think that I saw in February that Silicon Valley Bank was gonna go down in a matter of weeks. And perhaps there’s something else on the horizon. So it’s working in terms of tightening financial conditions, it seems like the unemployment rate hopefully, will not be as tight as it is at the moment, but maybe that takes some AI or some exogenous action for that, to really come to fruition in a way that the Fed wants it to that isn’t necessarily a result of Fed policy.

But as I said, you know, it seems like inflation is slowing, it’s still rising but slowing, so it seems like they’re on the right path. Last but, you know, with the as we saw with banks that the economy is a fragile sort of balloon, and, you know, you can pop it pretty easily if if we move too quickly.

Julie: So now let’s move on from CPI. Kim, it may be too early for this. But I gotta ask you, do you have the poll for next week?

Kim: Um, yeah, I did. We switched it up this week’s pass poll on our audience, I hope they’ll forgive me for that. But we went into the debt ceiling debate, which became a hot topic and actually got the the biggest number of responses that we’ve had on a Wall Street breakfast survey on whether or not there should be some kind of move on the 14th amendment or omit the coin solution other than both sides getting together and coming up with an agreement 50 plus percent of our respondents said, no, there shouldn’t be anything like that.

The remainder were kind of split between whether there should be just a wait and see negotiation period, and everything would be okay. Or it’s still too tough to tell, but that people really didn’t like the idea of a kind of meant the coin idea.

Coming up next week, we’re gonna be looking at an issue with regional banks that Kevin just talked about whether the pressure on regional banking stocks is too much, and the if the SEC should do what they did in 2008, and stopped short selling on a number of issues, just to kind of slayed lies the market.

It’s a controversial move, no doubt, but the SEC does have the power to do it. So we’d love to hear people’s thoughts about that.

Julie: Do you think that would work?

Kim: I don’t think it would work recursively because I think that the the short selling pressure is providing liquidity. A lot of sort of sales will argue that there is a very good argument that there is too much naked short selling going on, and that sometimes more than 100% of shares can be shorted.

But I don’t think that that is the real pressure that’s on regional banking stocks as much as the kind of panic selling and there’s nothing you can really do about that. If the algos all suddenly say sell, sell, sell, like in Trading Places, then people are diving in. That’s the problem that, you know, banning short selling is not going to stop.

Kevin: Yeah. And also, you know, we talked about this last week, but the the crux of the problem is that there’s massive outflows of deposits. I mean, when you saw first republic report, it was there’s massive numbers. So of course, you know, Kim said the algos are gonna jump on it.

But everybody’s gonna jump on that number once it comes out because it looks like there’s nobody that wants to bank with them anymore. So these are kind of like fundamental issues with the the stability of the regional banking sector that it doesn’t really matter whether people are shorting it or not.

Kim: And it didn’t really help much in 2008, we have to say.

Julie: And of course we’ll also have the survey here on Wall Street breakfast, the podcast. We’ll talk about it Monday, right here on the show. That’s it for today. Everyone, have a great weekend. See you next time.

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