No Waiting: Checkout Lines Thinned in Q1, Target Signals 'Challenging' Retail

(Wednesday market open) Consumer spending is losing steam under pressure from rising prices and economic uncertainty. That’s what earnings from major retailers suggest so far this week, though stocks generally trended higher this morning on hopes for a debt ceiling solution.

Home Depot’s (HD) quarterly results misfire Tuesday established an initially sour tone for a late leg of the earnings season featuring several U.S. big-box retailers.

Earlier today, Target (NYSE:TGT) shared a quarterly earnings report that generally surpassed analysts’ expectations, but the company’s cautious tone about consumer confidence splashed some cold water on the numbers. 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 making consumers more careful about their purchases.

Up next: Walmart (NYSE:WMT), which reports Thursday morning. Judging from how retail earnings have progressed so far, with customers focused more on staples, Walmart might get a tailwind from its large grocery business.

As investors try to decipher what the latest Q1 store results say about the path of the economy, they’ll be keeping a nervous watch on Washington, D.C., as debt ceiling negotiations between the White House and Congress approach a potential June default.

On the positive side, retail bank shares climbed this morning. The market is still hypersensitive to this sector. However, the Dallas Fed survey released earlier this week showed more signs of credit tightening and loan demand shrinking, an ominous development for banks.

• The 10 Year Treasury Yield is down 2 basis points at 3.52%.
• The U.S. Dollar Index ($DXY) climbed to 102.9, the highest since late March.
• The Cboe Volatility Index® (VIX) futures slipped to 17.67.
• WTI Crude Oil (/CL) inched up to $71.07 per barrel.

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Early Wednesday, the Census Bureau reported U.S. housing starts rose to a seasonally adjusted annual rate of 1.401 million in April, but the March data were revised down. Housing starts, which measure residential construction but also gauge consumer confidence and overall economic health, were expected to come in at around 1.405 million, according to Briefing.com.

Building permits, a longer-view measure of housing demand, were issued at a seasonally adjusted annual rate of 1.41 million during April, below a Briefing.com consensus of 1.438 million. It was the second straight monthly decline.

Housing activity plunged over the past year as the Federal Reserve raised interest rates, making home mortgages an increasingly costly proposition.

Target (TGT) reported net earnings per share (EPS) of $2.05, down from $2.19 during the same quarter a year earlier but above Wall Street expectations. Revenue totaled $25.3 billion, just barely above the average analyst estimate. The company maintained its outlook.

In its press release, TGT referred to a “very challenging environment” and “ongoing softness in discretionary categories.” The company plans to stress affordability and said its inventory position is healthy. Shares of the stock barely moved ahead of the bell.

Target shares, like those of many large retailers, are down from 2022 highs amid slowing sales and higher costs for goods. The company’s stock was up slightly over 5% so far this year but down 37% from a peak near $250 in April 2022.

Another retailer reporting Wednesday, TJX Companies (NYSE:TJX), saw shares come under pressure, too, in premarket trading, despite earnings per share topping analysts’ estimates. A slight revenue miss appeared to weigh. Foot Locker (NYSE:FL) reports Friday and Kohl’s Corp. (KSS ) is scheduled to report May 24.

Investors also will receive another read on the tech sector with Cisco Systems (NASDAQ:CSCO), which will report results after today’s market close. The software and cloud computing company is expected to post EPS of about 87 cents, compared with 78 cents a year earlier. CSCO is often seen as a proxy for info tech sector health, as it has a vast footprint in the tech world across geographies.

Tesla (NASDAQ:TSLA) shares bounced slightly in premarket trading, possibly reflecting optimism after yesterday’s shareholders meeting.

The probability of a June rate pause is holding around 78%, according to the CME FedWatch Tool. The tool also prices in about a 50% chance the Federal Reserve will lower rates in September and a 97% chance of rates being below current levels by the end of this year.

Comments from Fed leaders, as always, hold potential to move markets the rest of this week. Many Fed officials appear determined to quash any notions that the central bank could be nearing a “pivot” that would be followed by a rate cut. On Monday, Atlanta Fed president Raphael Bostic told CNBC he doesn’t expect any interest rate cuts at least through 2023, even if the economy slips into recession.

“For me, inflation is job No. 1. We’ve got to get back to our target,” Bostic said.

The speaking slate this week includes Fed Governor Philip N. Jefferson, who will appear Thursday at an insurance forum in Washington, D.C., as well as Fed Vice Chair for Supervision Michael S. Barr, who will address the Senate Committee on Banking, Housing, and Urban Affairs, also Thursday.

At 11 a.m. Friday, Fed Chair Jerome Powell and former Fed Chair Ben Bernanke will appear together at a Washington, D.C., research conference.

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

Market concerns over a potential default have ticked higher this week, with the Cboe Volatility Index® (VIX) jumping Tuesday near 18—the highest level in nearly two weeks. The VIX is up from an 18-month low around 15.78 posted in late April.

Also worth checking today is the Energy Information Administration’s (EIA) weekly U.S. crude oil inventory report, scheduled for 10:30 a.m. ET. A week ago, EIA reported a build of 2.95 million barrels. WTI crude oil futures are hovering just above $70 per barrel, down about 15% from five-month highs above $83 in mid-April, suggesting U.S. motorists may catch some relief at the pump with the summer driving season just around the corner.