Eyes on the consumer ahead of Black Friday and the holidays

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It has been a difficult year for American consumers. Inflation everywhere. Rapidly rising interest rates. A real estate market that is starting to cool. This begs a question with the holidays around the corner: are shoppers finally out?

We’ll get a better idea of ​​it this week.

There is a LOT of data coming out in the next few days that will give important clues to the health of the economy. In addition to a series of retail earnings reports, the government will report its retail sales data for October on Wednesday. Economists expect a 0.9% monthly jump. Sales remained unchanged in September, a possible sign that inflation was putting a strain on consumers.

But the most recent October Consumer Price Index data provided some relief to buyers … and to Wall Street. The pace of year-over-year price increases slowed more than expected, triggering a massive equity market rally on Thursday.

Several major retailers are also on hand to report their results for the final quarter … and potentially provide sales prospects for the coming months. Walmart (WMT), Target (TGT), TJ Maxx and Marshalls owner TJX (TJX), Macy’s (M), Kohl’s (KSS) and Gap (GPS) are all on this week’s earnings calendar.

The Fed’s relentless rate hikes in recent months have pushed credit card rates to all-time highs. So this year will be more expensive than ever for many consumers looking to buy gifts with their Visa and Mastercard. Black Friday, after all, is less than two weeks away.

Consumer spending increased 1.4% during the third quarter, according to the government’s latest report on gross domestic product (GDP). This is still decent growth, but it’s a slowdown from the first and second quarters.

The big question that retailers face is whether or not they are able to continue raising prices. So far, consumers (perhaps because of this) have continued to spend despite the shock of the stickers. Of course, it helps that wage growth has remained quite robust.

“Retailers have been able to pass the rise in producer prices to consumers and maintain solid cost markups,” Moody’s economists said in a recent 2023 Outlook report.

Moody’s economists added that the still healthy labor market is one reason consumer demand trends “remained overly resilient.”

Retailers clearly need a bit of a good mood during the holidays. Consumer stocks were hit hard this year due to fears of inflation and recession, plunging even more than the market overall.

The SPDR S&P Retail ETF (XRT), a fund that has Victoria’s Secret, Abercrombie & Fitch (ANF) and Gap among its top holdings, is down more than 25% this year.

However, some experts worry that retailers may continue to struggle into 2023. Consumers may eventually need to take a closer look at their wallets as concerns over an impending economic downturn grow.

“What makes us cautious are the earnings estimates, which in some cases are a little too high, in our opinion. As growth slows, those numbers have to go down, ”said Matt Quinlan, Franklin Templeton’s portfolio manager, in a recent webcast.

Quinlan added that “some parts of the … consumer discretion [sector] would be the ones where earnings estimates need to be lowered a little more. ”

Fed rate hikes could eventually slow broader consumer spending. But there is another notable area of ​​the economy that has already been hit hard by the aggressive central bank tightening: the housing market.

Mortgage rates have risen above 7%, making it more difficult for first-time home buyers to afford a home.

Towards the end of this, a report on the start of housing and building permit data for October will be released week. So will the figures for existing home sales. Economists interviewed by Reuters predict that 4.4 million homes were sold last month. It would be down from 4.7 million homes in September and 6.3 million in October 2021.

The housing market may not necessarily be in the midst of a spectacular crash as it was in the late 2000s after a subprime mortgage craze fueled a huge bubble. But home sales are clearly losing strength.

With that in mind, it will be interesting to see what home improvement retail giants Home Depot (HD) and Lowe’s (LOW) have to say about construction, both of which reported earnings this week.

Both companies can benefit from a “nesting” trend, where current homeowners decide to spend more on home improvement because they want to stay in their home. But the two dealers may get less of a lift if there are fewer new homebuyers looking to repair homes.

Inflation could also be a problem. When Home Depot reported its most recent earnings in August, it noted that customers haven’t made all of their purchases a year ago.

The total number of transactions decreased by 3% compared to the same period in 2021. But that decline was offset by higher prices. Home Depot said customers spent an average of just over $ 90 on purchases, a 9% increase from a year ago.

Investors seem concerned that rising prices will eventually hurt Home Depot and Lowe’s as well. Home Depot’s stock was down nearly 25% this year, while Lowe’s stock was down about 20%.

Sunday: President Biden and Chinese leader Xi meet at the G20; retail sales in China; GDP of Japan, industrial production of the Eurozone; Earnings from Tyson Foods (TSN) and Oatly

Tuesday: Producer Price Index in the United States; earnings from Walmart, Home Depot, Tencent Music (TME), Energizer (ENR), Krispy Kreme, and Advance Auto (AAP)

Tuesday: retail sales in the United States; commercial data in Japan; inflation in the UK; Earnings from Target, Lowe’s, TJX, Cisco (CSCO), Nvidia (NVDA) and Bath & Body Works

Tuesday: US Weekly Unemployment Claims; US housing start and building permits, UK budget; Earnings from Alibaba (BABA), Macy’s, BJ’s Wholesale (BJ), Kohl’s, Applied Materials (AMAT) and Gap

Friday: US Existing Home Sales, Earnings From JD.com (JD) and Foot Locker (FL)