RETAILING

Personal Income and Outlays, April 2022

Just out:

Retailers Get Lift From Resilient Shoppers Macy’s and Dollar Tree reported strong sales that bucked broader trends among retailers, but they warned of signs that inflation is changing consumer behavior.

Macy’s Inc. M 19.31%▲ and Dollar Tree Inc. DLTR 21.87%▲ reported strong sales increases in their most recent quarters. Those results came as shoppers spent more on clothing for work and special occasions, while turning to discount chains for necessities to offset rising costs for food and fuel. Another budget chain, Dollar General Corp., DG 13.71%▲ posted flat sales but raised its outlook for the full year, saying cash-strapped shoppers are gravitating to its stores more frequently.

The results, which sent shares of all three chains higher, ran counter to the performance of other large retailers such as Walmart Inc. and Target Corp., which last week reported steep profit declines as rising supply-chain, wage and inflation-related costs ate into earnings. On Thursday, Gap Inc. reported a steep sales decline and swung to a net loss. The company said its poor results were due to macroeconomic conditions and size and assortment imbalances at its Old Navy chain, which has been offering a wide range of sizes for all body types.

Executives at Macy’s and the dollar chains said they are feeling many of the same pressures that have hurt other retailers, and in some cases warned those forces would start to show up in their own results.

“Consumers are still spending, but headwinds are getting increasingly fierce,” Macy’s Chief Executive Jeff Gennette said in an interview. He added that its lower-income shoppers—those with household incomes of $75,000 or less—are trading down to less expensive items while middle- and higher-income shoppers have been less affected by inflation. (…)

Costco Wholesale Corp. said Thursday same-store sales rose 10.8% excluding currency and fuel fluctuations in the most recent quarter. Nordstrom Inc. this week reported a sharp increase in sales driven by categories such as apparel, shoes and designer items. (…)

Macy’s is benefiting from a shift toward dressier clothes meant for returning to the office and attending special occasions. That has left it with a surplus of items that were in demand during the height of the pandemic such as casual clothes, activewear and some home items that the company says it will need to discount to clear out. (…)

Adrian Mitchell, the retailer’s finance chief, said he expected inflation to outpace wage growth and contribute to an increase in bad credit-card debt. He also said that Macy’s would return to more normal hiring levels following an elevated pace last year, a sign the labor market might be cooling.

Macy’s reaffirmed its sales guidance for the year, of flat to an increase of 1% compared with last year. [After +13.6% in Q1].

At Dollar Tree, same-store sales—those from stores operating for at least 12 months—rose 4.4% during the quarter ended April 30, after the company broadly raised prices above $1 an item. (…)

Dollar General said same-store sales decreased 0.1% as fewer shoppers visited its locations in the April-ended period. (…)

Dollar General’s core shoppers—those from households that earn around $40,000 a year—are coming in more often and buying less in recent weeks, he said. “That would tell you that she’s trying to make ends meet,” Mr. Vasos said of a typical such customer. Higher-income shoppers, or those looking to burn less gas by shopping closer to home, are visiting more often, he said. (…)

Family Dollar’s same-store sales declined 2.8%. (…)

• Dollar Tree to Sell More Items Above $1 as Costs Rise Discount chain expanding earlier tests to boost prices, citing higher wage and freight costs

Retailers’ sales growth rates are all over the map, from -8.5% at Best Buy and Dick’s to +10.8% at Costco’s and +28% at Bloomingdale’s. Lockdowns, geography, target clientele, merchandise mix and quarter end combine to create confusion, from despair to exuberance. Even among discounters: Family Dollar -s -2.8% vs Dollar Tree +4.4%.

From the conference calls, we know that overall sales softened in March and got quite weak in April. The official stats confirm the trend, particularly looking at real sales. In April, nominal retail sales (red) were up 8.2%, but real retail sales per the St-Louis Fed (blue) were flat and my own version of real sales (black) was down 3.8%.

Amazon sales were up 7% in its Q1 ended in March, negative in real terms. WMT and TGT had comp sales up 3.0% and 3.3% respectively in nominal terms in their Q1 ended in April.

May U.S. Light-Vehicle Sales to Fall from April, But Q2 Still Expected to Improve on Q1

Via CalculatedRisk:

The Wards forecast of 13.4 million SAAR, would be down about 6% from last month, and down 20% from a year ago (sales were solid in May 2021, as sales recovered from the depths of the pandemic, and weren’t yet significantly impacted by supply chain issues).

Microsoft Slows Some Hiring Amid Economic Uncertainty The software company is the latest tech giant to become more cautious about hiring.

The Redmond, Wash., company said it would be reducing the pace at which it hires people for its software group that develops its Windows, Office and Teams applications. The group had been one of the company’s fastest-growing divisions in recent years. (…)

While the pace of hiring may be falling, Microsoft has pledged better pay for employees. Earlier this month, the company told staff it would be boosting compensation, in part in reaction to challenges created by low unemployment and high inflation. (…)

Other large tech players like Meta Platforms Inc., Twitter Inc. and Uber Technologies Inc. have also announced that they would be scaling back on hiring plans.

US Wage Increases Show Signs of Peaking in Welcome Sign for Fed

Goldman Sachs’ wage tracker is not topping out yet:

Source: Goldman Sachs Global Investment Research

• CEO pay rose 17% in 2021 as profits, share prices soared. (AP)

U.S. Pending Home Sales Decline Sharply in April

Home buying remains under pressure. The Pending Home Sales Index from the National Association of Realtors fell 3.9% (-9.1% y/y) during April after falling 1.6% in March, revised from -1.2%. It was the sixth consecutive monthly decline with total sales down 22.4% from the August 2020 peak.

Pending home sales declined in most of the country in April, except the Midwest where they rose 6.6% (-2.8% y/y) and recovered the prior month’s decline. Sales in the Northeast declined 16.2% (-14.3% y/y) to the lowest level since May 2020. In the South, sales fell 4.7% (-10.3% y/y), down 18.8% in the last six months. In the West, sales weakened 4.3% (-10.5% y/y), off 16.9% since October.

  

• Nearly one in five home sellers dropped prices during the four-week period ended Sunday, according to Redfin.
• Home listings jumped 9% last week. (CNBC)
• Big cities shrink

Data: Census Bureau. (Population is July 1, 2021.) Chart: Baidi Wang/Axios

More than half of the country’s 15 largest cities saw population decreases between July 2020 and July 2021, Axios’ Ivana Saric and Baidi Wang report. Chicago and San Francisco populations have now dropped close to their 2010 levels, The Wall Street Journal reports. New York (8.5 million) shrank. But it’s still more than twice the size of the next largest city, L.A. (4 million), the Census Bureau said.

Not your average tightening You need to be like old and experienced to have seen this type of “Financials Conditions” tightening before… (The Market Ear)

Is China’s No. 2 Staging a Stealth Covid-Zero Protest? In recent weeks, Li has re-emerged with his own voice. He has been pressing officials to stabilize an economy ravaged by draconian Covid-related lockdowns, while Xi has continued to push the zero-tolerance policy.

(…) While he didn’t criticize the Covid-zero policy or suggest shifting from it, the message was clear: Don’t overdo Covid containment.

An economist by training, Li talked at length about fiscal constraints and discipline. Beijing no longer has the money to spare, he said, a rebuff to provinces appealing for financial help:

This year’s transfer payments to local governments are the largest in recent years… I am here to let you know the bottom line. There is a reserve fund managed by the premier for natural disasters. Other than that, municipalities must manage to raise funds on their own.

“Put your limited funds to good use,” Li warned, according to a copy of the speech transcript seen by Bloomberg Opinion.

China’s political system is lopsided. While Beijing holds the purse string, locals have the shovels. The burden of policy execution, from building infrastructure to stamping out Covid outbreaks, lies with municipal, county and provincial officials. When local party chieftains believe preventing Covid outbreaks is their only performance metric, they can spiral into fierce competition, bidding to outdo each other with mass testing and lockdowns, especially in a politically important year. (…)

On the day of his speech, the National Healthcare Security Administration, which reports directly to the State Council where Li is the highest-ranking official, said it would no longer pick up the bills. In other words, if local governments want to conduct mass testing, they must pay for it themselves. Until now, Shenzhen billed 90% of its Covid tests to the national health insurance, reported Caixin.

And it’s not as if local governments are flush with cash. Municipalities get roughly one-third of their income from land sales. In the first four months of this year, the take from these transactions tumbled 30%. In other words, every yuan spent on mass testing and quarantine is an opportunity lost to build infrastructure and boost employment. (…)

• Xi-Li Discord Paralyzes Officials Responsible for China Economy
• Apple Supplier Faces Worker Revolt in Locked Down China Factory

Violent clashes, mounting infections and vacant factory floors: the turmoil that’s engulfed tens of thousands of workers at an Apple Inc. supplier in Shanghai is a troubling symptom of China’s extreme efforts to keep factories humming during its worst Covid outbreak since 2020.

Trapped in a bubble for almost two months, locked down by government decree and walled off from the outside world, Quanta Computer Inc.’s mostly low-wage workers are demanding more freedom and beginning to revolt against their overseers, people familiar with the matter said, asking not to be identified for fear of reprisals. (…)

The upheaval at one of the most prominent manufacturers operating out of the affluent eastern Chinese region adds to the growing tumult across society and industry over virus curbs. (…)

In past months, college students in Beijing have rebelled; housing compounds have staged protests; and social media users posting critical videos have tried to outwit an army of censors. (…)

Job Vacancies Hit Record in Canada’s Ever-Tighter Labor Market Openings increased 13.4% seasonally adjusted to just over 1 million, Statistics Canada reported Thursday, based on its monthly survey of employers. That’s up about 60% from the same period a year earlier.

The job vacancy rate — the number of unfilled jobs as a share of all positions — was 5.9% in March, matching a record high recorded last September. There was an average of 1.2 unemployed people for each job vacancy, down from 1.4 in February and 2.6 a year ago, according to the statistics agency. (…)

Separately Thursday, the Canadian Federation of Independent Business reported its members see wages rising by a record 3.5% average over the next year. About 35% of respondents see wage growth of at least 5%, also a record in monthly survey data back to 2009. (…)

• Canada Retail Receipts Unchanged in March on Fewer Car Sales

(…) Core retail sales, which exclude gasoline and automotive and parts, increased 1.5% in March. In volume terms, sales were down 1%. Still, sales are expected to increase 0.8% in April, according to preliminary estimates. Retail sales were up 3% in the first quarter of this year, the largest increase since the third quarter of 2020.

• Bank of Canada set for another 50bp hike

A strong economy, booming jobs market, and elevated inflation argue for another “forceful” 50bp hike on 1 June. And the Bank of Canada is unlikely to stop there, with a red hot housing market and support from rising commodity prices suggesting it may be even more aggressive than the Fed this year. We expect CAD to benefit from BoC tightening in the medium term. (ING)

Employment levels versus pre-pandemic peak

In response, the Bank of Canada’s commentary is becoming more robust. Deputy Governor Toni Gravelle warned this week that inflation has been “higher and more tenacious” than expected and the Bank is “committed” to bringing it down to target. Moreover, “our policy rate, at 1%, is too stimulative” and the bank is “prepared to be as forceful as needed” to get inflation to 2% and that involves getting to the neutral range for rates at 2-3% “quickly”.

This followed comments from Senior Deputy Governor Carolyn Rogers who also pointed to the need to get interest rates higher quickly “with the Canadian economy starting to overheat”. With BoC Governor Tiff Macklem having told us back in April that the Bank will no doubt be “considering taking another 50bp step”, it is unsurprising that the market is fully backing such a move on 1 June, given the latest raft of data. We would argue that you cannot dismiss the possibility of a 75bp hike given the current macro environment.

We don’t think the 50bp moves will stop next week. Canada’s economy is being boosted by rising commodity output in response to the global surge in prices in everything from oil to aluminium to wheat. At the same time, the housing market is even hotter than that of the US with the average home price nine times the average household income versus a “mere” 5.5 times income in the US.

Mortgage rates have not risen as rapidly in Canada as they have in the US due to the typical mortgage being a five-year mortgage amortised over 25 years. This rate is more determined by what happens to short-term borrowing costs rather than big swings at the long end of the yield curve, as for the typical 30Y fixed-rate US mortgage. To generate the same degree of monetary tightening, the Bank of Canada tends to need to be more aggressive on policy rate increases.

Consequently, we see greater upside for BoC rates than for the Fed funds rate in the US, with the Bank of Canada set to hike to 3.5% in early 2023, above the 2-3% “neutral range” highlighted by some BoC officials. Nonetheless, as in the US, the harder and faster you go to try and get a grip on inflation, the greater the chance of an adverse reaction in the economy. We wouldn’t be surprised to see the BoC having to consider reversing course in late 2023. (…)

We think the chances that the BoC will hike rates to 3.0% before the end of 2022 are quite elevated, which suggests that – unlike elsewhere in the G10 such as the eurozone or UK – there is some sizeable room for further hawkish re-pricing in rate expectations in Canada. Ultimately, this factor – along with the rate advantage itself – is a bullish argument for the loonie in the medium run, and we continue to see BoC tightening as a contributing factor to pushing USD/CAD below 1.25 in the second half of the year. (…)

At the current juncture, USD/CAD dynamics remain strictly tied to swings in global risk sentiment. We’ll likely need to wait for a sustained stabilisation in sentiment before we can see USD/CAD re-align with its fundamentals (rates, commodities, and growth stories), which point to a stronger CAD. With market instability possibly extending into the summer, USD/CAD may stay close to the 1.27-1.28 area, gearing up for a break lower in the latter part of the year.

UK imposes 25% energy windfall tax to help households as bills surge

Britain announced a 25% windfall tax on oil and gas producers’ profits on Thursday, alongside a 15 billion pound ($18.9 billion) package of support for households struggling to meet soaring energy bills.

The move, which will give each UK household a 400 pound discount on their energy bill and more for lowest-income households, marks a change of heart for Prime Minister Boris Johnson’s government, which had previously resisted windfall taxes, calling them a deterrent to investment. (…)

More than 8 million low-income households will receive an extra 650 pound cost-of-living grant, with smaller additional sums for all pensioners and the disabled. (…)

TECHNICALS WATCH

From CMG Wealth:

• S&P 500 Large Cap Index – 13/34–Week EMA Trend Chart

• Volume Demand vs. Volume Supply (NDR)

SPACs Are Warning They May Go Bust More than two dozen companies say they may not survive much longer.

AAA predicts 39.2 million Americans will travel 50 miles or more from home this holiday weekend, nearly 90% of them by car.

• But they’ll shell out 50% more than last year to fill up their gas tanks.
• The national average for a gallon of gas is $4.60, up $1.56 from last year, per AAA.

Data: ZETA; Chart: Axios Visuals

• Electric air taxi startup Joby has been approved to carry paying passengers aboard conventional aircraft, the company tells Axios Generate’s Andrew Freedman.

Joby’s insect-like, ultra-quiet electric vertical takeoff and landing (eVTOL) aircraft are still undergoing testing. So for the time being, any Joby commercial flights will be limited to four-seat, gas-powered Cirrus planes.

• The new Federal Aviation Administration certification, says Joby product chief Eric Allison, will help the company develop a customer-facing booking app, pilot workflow software and maintenance data reporting tools.
• That experience, company reps say, will make it easier to deploy the eVTOL aircraft if and when Joby is cleared to fly passengers aboard them.

Joby Aviation’s eVTOL aircraft. Photo courtesy Joby Aviation