Morning Note: Signs the Consumer's Pulling Back

In yesterday's blog post I suggested that the Fed isn't quite yet ready to welcome, nor support, rallying markets:

"It’ll be interesting to see (amid softening inflation reads) the degree to which Fedheads push back against what amounts to a market-induced loosening of financial conditions."

News from Target this morning, however, is, frankly, what the Fed is after:

"Target saw sales decline as families contended with higher prices, making trade-offs between what they need and what they want – a potential warning sign for the holiday shopping season. Target Chief Growth Officer Christina Hennington said customers’ price sensitivity intensified during the last two weeks of October.

“It was a precipitous decline and, frankly, we’ve seen those trends in the early part of November as well,” she said on a call with reporters."

As a slowing economy -- which jibes with our present go-forward thesis -- is what the Fed doctors are ordering to slow the pace of inflation.

This essentially echoes yesterday's commentary out of Walmart:

"Shoppers are watching how they spend, Walmart Chief Financial Officer John David Rainey said on a call with CNBC. They are buying less-expensive proteins such as hot dogs, beans and peanut butter instead of pricier meats. They are waiting for sales events to buy items like TVs and air fryers and are spending less in the apparel and home categories.

“Pocketbooks are stretched,” he said. “People have less discretionary income or less disposable income to spend on things — and so they’re looking for value.”

People are trading down in other categories, too, he said on a call with investors. They are buying less expensive versions of baby items and baking goods — including more products from Walmart’s own brands."

Yesterday's report from the Fed on consumer credit also speaks to the questionable health of the US spender:

"Credit card balances surged from July to September as Americans continued to sink deeper in debt amid rampant inflation, the Federal Reserve Bank of New York said Tuesday.

Credit card balances increased $38 billion in the third quarter to $930 billion, the New York Fed found, with balances once again matching the pre-pandemic peak of $930 billion in the fourth quarter of 2019. Year over year, credit debt grew by 15%, the largest jump in more than 20 years.

The figures underscore Americans' growing dependence on credit cards even as recent Fed rate hikes push interest rates to record highs, placing a heavier burden especially on lower-income households and younger adults.

“New purchases adding to the credit card balance reflect robust demand amid higher prices of goods and services,” a group of New York Fed researchers said in a blog post. “The Consumer Credit Panel sheds light on the more rapidly increasing debt burdens and delinquency of younger and less wealthy card holders, and may suggest disparate impacts of inflation.”"

Better news comes from the delinquency data, which jibes with our view that, for now, despite the above, the consumer remains relatively (financially) healthy:

"...delinquency levels remain low compared with the Great Recession and through the period preceding the COVID pandemic, the New York Fed noted, suggesting that consumers are still able to “manage their finances” through this period of price increases."

Now, all the above said, then this a few minutes ago:

"Retail sales rise by most in eight months in broad increase."

So, yes, that contradicts the messaging from Target and Walmart, however, it does speak to the general strength of the consumer, but it should not be construed as robustly good news... Clearly it speaks more about inflation -- as nominal [dollar value] of retail sales will rise notably if unit sales remain relatively flat, or decline less than the pace of inflation -- than it does confidence among shoppers.

Stay tuned... 

Asian equities struggled overnight, with 11 of the 16 markets we track closing lower.

Europe's in the red this morning as well, with 17 of the 19 bourses we follow trading down as I type.

US stocks are lower to start the session: Dow down 31 points (0.09%), SP500 down 0.31%, SP500 Equal Weight down 0.55%, Nasdaq 100 down 0.89%, Nasdaq Comp down 0.89%, Russell 2000 down 0.95%.

The VIX sits at 24.31, down 0.94%.

Oil futures are down 2.05%, gold's down 0.25%, silver's up 0.23%, copper futures are down 1.48% and the ag complex (DBA) is down 0.47%.

The 10-year treasury is up (yield down) and the dollar is down 0.14%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 10 -- led by Vietnam equities, long-term treasuries, healthcare stocks, Eurozone equities and consumer staples stocks -- are in the green so far this morning. The losers are being led lower by MP Materials, AMD, Amazon, base metals futures and base metals miners.

"In the complex world, the notion of “cause” itself is suspect; it is either nearly impossible to detect or not really defined—another reason to ignore newspapers, with their constant supply of causes for things."

--Taleb, Nassim Nicholas. Antifragile

Have a great day!
Marty