June Retail Sales Add to Rate-Cut Expectations, Boost These Holdings
While positive, we believe the market could be once again getting ahead of itself when it comes to the number of potential rate cuts this year.
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* Market expectations for rate cuts this year are rising, boosting several portfolio holdings.
* Chair Powell reiterated the Fed will not wait for 2% inflation to start cutting rates, but even more good data may be needed.
* The June Retail Sales report show spending slowed compared to May, likely adding to rate-cut expectations.
* June Retail Sales also support our positions in Costco and Amazon as Prime Day 2024 kicks off.
Stocks were buoyed yesterday by comments from Fed Chair Powell reiterating the Fed won’t wait until inflation is down at 2% to start cutting interest rates, and that he does not see a hard landing for the U.S. economy. Powell also said that data received during the June quarter “add somewhat to confidence” that the pace of inflation is moving lower on a sustained basis. Reading between those comments it suggests to us that the Fed still wants to see more “good data” before embarking on rate cuts.
Still, rate-cut expectations have been building, helping power shares of portfolio holdings United Rentals URI, Vulcan Materials VMC, and Builders FirstSource BLDR. As of this morning, the CME FedWatch Tools puts the odds of a September 25-basis point rate cut at 87.6%. It also shows the market expecting two additional rate cuts before the end of 2024. While the market does not see a rate cut when the central bank concludes its next policy meeting in roughly two weeks, we will be looking to see what is said in the corresponding policy statement and Powell’s tone during the post-policy press conference to better the judge the potential for a September rate cut.
The same goes for the remaining June, July, and August data we’ll get ahead of the Fed’s September policy meeting. This morning’s June Retail Sales report, while better than expected, is another set of data showing that part of the economy is slowing. Not tremendously, but certainly at a slower pace than the last few months. We have a few more pieces of June data later this week, and we’ll be looking at the aggregate picture.
While this is positive for the market and the portfolio, our concern remains that the market could be once again getting ahead of itself when it comes to the number of potential rate cuts this year. Another reason we will continue to follow the data and update our thinking as needed.
June Retail Sales Ahead of Expectations But Still Slower
June Retail Sales rose 2.3% year over year for total retail and food service sales, better than the 2.1% consensus forecast, but slower than May’s 2.6% increase. Breaking that into its two largest buckets, retail sales rose 2.0% in June vs. the year-ago level, a slower pace than May’s 2.2% figure. We also saw a sequential drop in Food Service & Drinking Places retail sales in June to 4.4% year over year from 5.1% in May.
Because the report shows a cumulative reading for the June quarter, we can surmise restaurant sales softened through the quarter given its 5.2% reading for the three months. The flipside for that is grocery sales, which climbed 1.7% year over year in June, its highest level in the last three months given the June quarter’s 1.6% figure. This tells us folks are re-engaging with eating at home and helps explain some of the pronounced share gains we’ve seen in the last few months from Costco COST. If there was any doubt about that, remember Costco’s adjusted U.S. comps sales rose 6.3% in June.
The June Retail Sales report also brought fresh confirmation for our thinking that shoppers would re-embrace digital platforms to stretch their spending dollars. Non-store retail sales increased 8.9% year over year in June, up from 7.5% in May and 7.9% in the June quarter. This clearly supports our position in Amazon AMZN ahead of Prime Day 2024 which runs today and tomorrow. Adobe Analytics sees spending on Amazon’s two-day event rising 10.5% year over year to roughly $14 billion. Based on what we learn following the event, we may tweak our AMZN price target higher ahead of the company’s upcoming June-quarter results.
At the time of publication, TheStreet Pro Portfolio was long URI, VMC, BLDR, COST and AMZN.
