Here's Why Amazon Could Help Skew July Retail Sales Report
Today's numbers could have unintended consequences for how we view the economy, rate cut expectations.
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* The headline retail sales report could surprise to the upside and here's why.
* The report has to be looked at from many angles, and could influence our approach to some holdings.
* Retailer earnings could give us a better indication of consumer spending.
With July inflation data out of the way, we're now zeroing in on the strength of the economy with gross domestic product reporting and those monthly retail sales numbers coming out soon.
The big questions are whether the Fed will cut the interest by a half-percentage point following its September policy meeting -- and whether the economy is slowing too quickly.
On the one hand, progress on inflation -- as seen in the producer price and consumer price indexes out earlier this week -- gives the Fed the all-clear to start a rate-cutting cycle. But on the other hand, the latest update for the Atlanta Fed GDP Now model that puts the third-quarter gross domestic product at 2.9% pushes back chances for a sizable first cut.
But there's a catch. Because the GDPNow model is a rolling forecast, it will be updated as new data is published, and that includes today’s July retail sales and industrial production report. The consensus forecast is for retail sales -- not including autos -- to rise just 0.1% compared to June. But remember: Amazon’s AMZN Prime Day was held in July and so were competing retailer events. Those big sales lead us to believe that the predicted sequential increase could be … conservative. So, while the report’s headline figures should be good for GDP revisions in the near term, spending from those big shopping events could result in softer sequential comparisons when the August retail sales report is published in mid-September.
If we're right about July retail sales, it could take some of the recent wind out of the market's sails. If we’re wrong, and the report is weaker than expected, we could see renewed concerns about the consumer and the speed of the economy. On that latter scenario, however, there's another catch: Bad news can be good news, as it would raise hopes for a bigger rate cut in September. Should that be the outcome of this morning’s data, we will be watching the portfolio for positions that have been performing well lately but that are not too far from our price target. Axon AXON, which has been on a tear so far this month, and is up more than 30%, is one example.
A Better Way to Interpret Sales
When it comes to getting a more accurate read on the consumer and spending, quarterly results and guidance from Walmart WMT, Tapestry TPR, and Dillard’s DDS will be insightful. We will also be looking for clues from Estee Lauder EL, Macy’s M, Target TGT, TJX Companies TJX, and Ross Stores ROST when they report next week. Odds are what we hear will be constructive for our "Cash-Strapped Consumer" model, but to the extent these companies issue conservative or otherwise underwhelming guidance, it means another round of downward revisions for expected second-half 2024 earnings per share for the S&P 500. This could revive investor contemplation over the current market multiple as we close out August, but we’ll continue to focus on companies with superior EPS prospects.
At the time of publication, the Pro Portfolio was long AXON and AMZN.
