This morning, investors received two important reports on the U.S. economy at 8:30 A.M. (EST). The Commerce Department reported that retail sales for the month of October fell 0.1%, which was slightly better than the consensus expectation of a 0.2% decline, but down sharply from the prior month’s gain of 0.7%. The retail sales report will be closely monitored by the Federal Reserve and Wall Street ahead of the all-important holiday shopping season, which officially kicks off next week on Black Friday. Today’s data suggest the consumer may be a bit more cautious on the spending front. A number of the major retailers have released their latest quarterly results the last few days (see below), and the accompanying commentary is providing a glimpse of what to expect from the retailers over the next six weeks.
Meanwhile, the Labor Department reported that producer (wholesale) prices for the month of October showed a further drop in inflationary pressures. The Producer Price Index (PPI) fell 0.5% last month, the lowest month-to-month reading since April, 2020. The core PPI, which excludes the energy and food components, was unchanged, and below the consensus estimate calling for an increase of 0.3%. On a 12-month basis, the PPI rose 1.3%, which was the lowest reading since the July figure of 1.1% and much smaller than the Wall Street consensus of +1.9%. The equity futures, which were higher heading into the releases, are still in positive territory, but did retrace some of the earlier gains.
The equity and bond markets powered higher yesterday, led by the small-cap stocks. The Dow Jones Industrial Average, the NASDAQ Composite, and the broader S&P 500 Index climbed 490, 327, and 84 points, respectively. At the midpoint of November, the major indexes are on pace for their best monthly performances in 2023. Yesterday’s rally was fueled by a report from the Labor Department showing a moderation in consumer prices. The more benign-than-expected CPI figures, which included a drop in shelter costs, raised sentiment on Wall Street that the Fed is done hiking the benchmark short-term interest rate. The sharp drop in long-term rates pushed the stocks of the major U.S. homebuilders notably higher during the session, leaving many of the building stocks trading at or near their all-time highs.
The Consumer Price Index (CPI) was unchanged last month, which was better than the consensus forecast of a 0.1% increase and down sharply from the 0.4% September gain. It was the lowest reading since the June, 2022 high. The core CPI, which excludes the energy and food components, also eased on a month-to-month basis, increasing just 0.2%. On a 12-month basis, the respective CPI and core CPI rose 3.2% and 4.0%, with both figures coming in below forecasts.
Moderating inflation figures put downward pressure on Treasury market yields and sparked the aforementioned broader equity market rally, which included a gigantic move higher in the small-cap sector. The small-cap Russell 2000 jumped an outsized 5.1% yesterday. The breadth of yesterday’s percentage-point spread between the S&P 500 Index and small-cap Russell 2000 has only occurred a few times over the last several decades, including during the recovery period from the Black Monday stock market crash in 1987 and in the fall of 2011 when the market was still rebounding from the selloff in equities during the Great Recession. The prospect of low lending rates helps the small-sized companies, as it reduces their cost of capital.
As noted, there were a number of major quarterly reports from the retailing sector released this week, including results from home improvement supplies giant Home Depot (HD). The Dow-30 component issued a cautious near-term outlook, and although the top and bottom figures were underwhelming, they did surpass Wall Street’s forecasts in the October quarter. The latter was enough to propel HD shares higher in a notably higher tape. This morning, Target Corp. (TGT), which has had a challenging 2023 campaign, reported top- and bottom-line results that exceeded Wall Street’s modest expectations. The company earned $2.10 a share in the October quarter, which was above the consensus estimate of $1.48, fueled by cost-cutting initiatives. The recently embattled shares are rallying in pre-market action. Tomorrow, we will get the latest quarterly figures from Walmart (WMT), which has performed much better than Target this year, and the stock has reflected the strong results. As noted above, the ongoing health of the retail sector is expected to be closely monitored by the data-dependent Federal Reserve as it formulates future monetary policies.
With credit markets continuing to tighten (the spread between real and nominal interest rates has widened with the recent move lower in Treasury market yields), investors will continue to track the health of the interest-sensitive financial and commercial real estate markets, which were under stress earlier this year, but the latest quarterly results did not produce any additional red flags for those sectors. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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