Back to top

Image: Bigstock

A Retailer Wall of Worry: Global Week Ahead

Read MoreHide Full Article

To start this Global Week Ahead, let’s review some key EPS reports coming out.

Yes, we have a plethora of retail earnings to digest this week.

On Monday, Zoom ZM reports.

On Tuesday, Best Buy (BBY - Free Report) , AutoZone (AZO - Free Report) and Nordstrom (JWN - Free Report) report.

On Wednesday, Dick’s Sporting Goods (DKS - Free Report) and NVIDIA (NVDA - Free Report) report.

On Thursday, Alibaba BABA, Costco Wholesale (COST - Free Report) and Macy’s (M - Free Report) report.

On Friday, Big Lots (BIG - Free Report) reports.

A few important major retail names -- Walmart (WMT - Free Report) and Target (TGT - Free Report) -- reported and disappointed traders (to say the least) last week.

Let’s review Zacks Research Director Sheraz Mian’s latest May 18th vintage Q1 earnings comments, written after the first batch of U.S. retail sector stocks came out.

Here are Zacks Research Director Sheraz Mian’s 3 retail earnings points —

(A) Disappointing results from bellwether retailers have raised questions about the health of the consumer in the current inflationary environment.

But the issue appears to be one of execution by the failing operators, rather than consumer spending, at least at this stage.

(B) For the Zacks Retail sector, we now have results from 93.6% of the sector’s market cap in the S&P 500 index.

Total Q1 earnings for these retailers are down -18.8% from the same period last year on +7.7% higher revenues, with 61.5% beating EPS estimates and 73.1% beating revenue estimates.

(C) The 61.5% EPS beats percentage is the lowest since 53.8% in 2018 Q4 and the second lowest in the last 5 years.

Next are Reuters' five world market themes, reordered for equity traders —

(1) Is this a bear market?


Wall Street is melting. Major stock market indexes are in the grip of bear market territory with S&P 500 down some 19%, the high-flying Nasdaq has lost more than a quarter of its value from a November 2021 peak. And there's no respite in sight: Barclays and Goldman predict further pain for equities as corporate margins suffer from surging inflation.

The selloff is widespread. Since the bond bull market peak in March 2020, a constant duration 30-year U.S. Treasury bond lost half its value, safe-haven gold is down 6% this quarter. Surging volatility means even hardened stock pickers are reluctant to take big bets.

Retail and institutional investors are also bearish. A U.S. retail investment sentiment index is close to a March 2009 low while fund managers are running their highest cash levels since September 2011.

(2) Will central banks in New Zealand and South Korea stay ahead of the FOMC?

They were early movers, but the race is on for central banks in New Zealand and Korea to stay ahead of a Fed hot on their heels with some big-step hikes.

The Reserve Bank of New Zealand is widely seen raising rates by a half point again on Wednesday to tame inflation though risks to the economy are rising with recent homebuyers feeling the pain of higher mortgage rates.

Korea's new central bank governor roiled markets by flagging a half point increase before his maiden meeting on Thursday. Falling behind the curve could squeeze the fragile won currency, sending imported food and energy prices soaring.

One of the few remaining holdouts, Bank Indonesia, is tipped to stay put a little longer when meeting on Tuesday.

(3) On Wednesday, May 25th, the latest FOMC meeting minutes come out

Can the Federal Reserve tame the worst U.S. inflation in decades without dragging the economy into a recession? The bank's meeting minutes on May 25 will offer clues.

Chair Jerome Powell is confident the Fed can achieve a "soft landing" -- words that are little solace to equity markets as recession warnings from big Wall Street banks pile up. Having raised rates by 75 basis points since March, the Fed is expected to hike another 50 bps in July.

Powell has vowed to raise rates as high as needed to tame inflation.

The minutes will show how tenacious policy makers expect inflation to be and whether growth is resilient enough to face much tighter monetary policy.

(4) Inspect the forward-looking Purchasing Manager Indexes (PMIs) this week

Forward-looking Purchasing Managers' Index (PMI) data from the United States, Australia, Britain, Japan and Euro-area is worth paying attention to.

And more so than usual with central banks caught between surging inflation and its impact on consumers amid a darkening growth outlook, hurt by China's COVID-lockdowns and the war in Ukraine.

China bounced back quickly from an initial 2020 pandemic slump thanks to bumper exports and factory production, but the current downturn could be harder to shake off.

Entrenched in their inflation fight, policymakers may reach a pivot point in coming months where they have little choice but to focus on recession risk.

PMIs have held up well recently, but might show how close that turning point is.

(5) Russia may offer up a sovereign debt default soon

The prospect of a Russian sovereign default is back given a deadline for a U.S. license allowing Moscow to make payments expiring on May 25th and $100 million in interest payments due a couple of days after.

Russia's $40 billion of sovereign bonds are just one of the flashpoints after its invasion of Ukraine on Feb. 24th sparked sweeping sanctions and counter measures from Moscow.

Also pressing, is whether gas will keep flowing to Europe as firms struggle to confirm how they can legally buy gas if they have to pay in roubles with payments due from May 20. The EU has advised companies against opening rouble accounts but stopped short of saying that this would breach its sanctions against Moscow.

Russia supplies around 40% of the EU's gas.

Top Zacks #1 Rank (STRONG BUY) stocks

Looking for places to possibly hide out in this market? Look into these 3 stocks.

(1) Analog Devices (ADI - Free Report) : This is an analog semiconductor stock, one that has been holding up well, while the rest of the sector sold off. The share price is $160, making for a market cap of $83.6B. I see a Zacks Value score of F, a Zacks Growth score of C and a Zacks Momentum score of B.

(2) Nutrien NTR: This is a fertilizer stock, made from natural gas feedstocks, I believe. I see a $101 share price, making for a $56B market cap. I also see a Zacks Value score of C, a Zacks Growth score of D and a Zacks Momentum score of F.

(3) Nucor (NUE - Free Report) : This is a major steel producer stock. I see a $120 share price, making for a $32B market cap. I also see a Zacks Value score of B, a Zacks Growth score of A and a Zacks Momentum score of A.

Key Global Macro

The World Economic Forum happens this week. It usually takes place in January, but Omicron scratched it out.

Travel is coming back. So are big confabs like this.

On Monday, Germany’s IFO indices come out for May. Business Climate should be 91.4, after a 91.8 prior print, Current Assessment should be 97.2, after a 97.2 prior print, and Expectations should be 85.8, after an 86.7 print. Not bad, considering…

The U.K.’s Rightmove Housing Price Index (HPI) is out. The reading is resting at a high +9.9% y/y annual number.

On Tuesday, Japan’s Jibun Bank manufacturing PMI for May should be 52, versus a 53.5 prior print.

The U.S. S&P Global Manufacturing PMI should be 58 in May, versus a 59.2 prior print.

The World Economic Forum happens in Davos, Switzerland.

On Wednesday, the Reserve Bank of New Zealand (RBNZ) offers a new rate decision. 2.0% is likely, after the 1.5% prior decision. This matters to where the FOMC heads, to ‘catch up’ to its peers.

The U.S. MBA mortgage applications data comes out. It was down -11% last time the data came out.

The World Economic Forum continues in Davos.

On Thursday, U.S. Q1 GDP gets a second look. The revised data should be -1.3% versus the ‘advance’ at -1.4%. This backward-looking data won’t move markets.

On Friday, University of Michigan consumer sentiment indices come out. I see a stable 59.1, after a prior 59.1 is the call. That is still very poor. This is where the inflation situation is playing out, most dramatically, in macro prints.

Conclusion

Big-box earnings struggles could foreshadow a broad consumer spending slowdown, one that may be front-running the FOMC.

Should U.S. consumption turn down, in the face of high final, point-of-sale prices seen at major retailers? Yes. It should! That is market economics 101.

Still, store retail spending growth would turn down from a very, very high absolute level.

The latest poor U.S. big box retail earnings reports happened in front of any FOMC meetings, raising rates to a 2.0% Fed Funds rate, later this summer. That is a policy rate where the Reserve Bank of New Zealand (RBNZ) likely heads this week.

Incorporating high price levels with price inflation, the FOMC remains behind the curve. Relative to the small central bank RBNZ crowd.

Further, the FOMC may have a set of restraining forces in hand: One that lowers the need for even more aggressive rate hikes. A nearly -20% decline in broad U.S. stock index prices adds a negative wealth effect, to this building mix of restraining forces.

A combo of higher policy rates coming, high fixed mortgage rates now, already high consumer sticker prices, and a deep stock selloff, is likely what is keeping the summation of present and future Fed Funds short-rates -- collected in the long-term 10-year U.S. Treasury rate -- struggling under 3.0%.

That 10-year U.S. Treasury rate is effectively the proxy U.S. economy ‘neutral’ rate.

Have a terrific trading week.

Warm Regards,

John Blank
Zacks Chief Equity Strategist and Economist