The Retail Sales Report Mostly Meets Expectations But Inflation Clouds The Results

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(Tuesday Market Open) S&P 500 futures were trading 1.68% higher before the market open despite mixed earnings announcements from Walmart WMT and Home Depot HD. Elon Musk’s acquisition of Twitter TWTR remains on hold because of questions around the platform’s number of bot and spam accounts. Meanwhile, gas prices are setting new records ahead of the big Memorial Day driving holiday.

Potential Market Movers

Gas prices hit another record with the national average topping $4.48 per gallon on Monday, according to AAA. The average price increased 15 cents over the past week and 40 cents over the last month. There may not be any relief in sight because RBOB gasoline futures were up another 0.53% in premarket trading for another 52-week high. Higher gas prices are likely to drive inflation higher.

Inflation was a major reason why Walmart WMT missed on earnings despite reporting better-than-expected revenues. CEO Doug McMillion pointed to rising food and fuel costs which pressured margins. The company updated its earnings guidance to account for rising costs, which lowered its forecast. WMT fell 6.72% in premarket trading. One notable issue in the report—WMT said it was overstaffed as employees returned to work faster than expected.

However, Home Depot HD was able to manage rising costs well enough to soundly beat on top and bottom line numbers. HD reported record first-quarter sales despite a slower start to the spring selling season. Sales guidance for 2022 was raised by 3% and HD’s operating margin estimate rose 15.4%. The stock rallied more than 3% in premarket action. One important difference between WMT and HD is that about 50% of HD’s customers are professionals, which is a good sign for the housing and home improvement markets.

The earnings news from these large retailers preceded the Census Bureau’s retail sales report before the market open. Retail sales grew in line with expectations of 0.9% in April while core retail sales grew 0.6%, above the forecasted 0.4%. The report isn’t inflation-adjusted, which clouds the picture a little. Additionally, consumer credit card debt and annual credit card rates are nearing all-time highs, which could suggest that retail sales may be on a weaker footing.

Other stocks making news this morning include Twitter TWTR. Prospective buyer Elon Musk continues to question how widespread the platform’s spam and bot problem is. Musk has challenged TWTR’s estimate that less than 5% of its accounts are fake, saying Twitter used a small sample size of just 100 accounts in that analysis. Musk countered with a different report saying that as many as 20% of Twitter accounts could be fake. Such accounts bring into question what advertisers are paying for on the platform and how it might hurt future ad sales.

Paramount Global PARA and Citigroup C were both trading higher before the opening bell on news that Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) bought shares in both. PARA rose 10.28% while C climbed 4.83%.

Equity index futures are rising as the U.S. Dollar Index ($DXY) retreats for the third day in a row and has now slipped below its April highs. Relief from the rising dollar should help multinational companies hurt by the strength in the greenback that are making their products and services more expensive to foreign customers. The Cboe Market Volatility Index (VIX) had dropped below 27, reflecting some of the relief investors are feeling with the falling dollar. However, the 10-year Treasury yield (TNX) was 40 basis points higher before the opening bell.

Finally, investors will be watching European Central Bank President Christine Lagarde and Fed Chair Jerome Powell because are both scheduled to speak today.

Reviewing the Market Minutes

Stocks kicked off the week mixed with the Dow Jones Industrial Average ($DJI) closing just 0.08% higher on Monday with the S&P 500 (SPX) and the Nasdaq Composite ($COMP) falling 0.39% and 1.2% respectively. The Energy Select Sector Index rose 2.64% thanks to a 3.2% rally in oil futures and a 1.36% rally in gasoline futures that took the commodity to a new 52-week high. Oil rallied on news that reopening plans for Shanghai were getting nearer which should spark an increase in demand for oil.

China had a pretty good day despite reporting weaker-than-expected retail sales and manufacturing data. A number of Chinese tech stocks were upgraded by JPMorgan JPM, starting with Alibaba BABA, Dada DADA, NetEase NTES upgraded to Overweight. JPM issued upgrades for Baidu BIDU, Bawsun BZUN, Bilibili BILI, and JD.com JD to Neutral from Underweight. Meanwhile, BofA Securities upgraded Nio NIO from Neutral to Buy.

Despite a more positive outlook for Chinese tech stocks, the U.S.-focused Technology Select Sector Index fell 0.88% and was the session’s second-worst performer. The consumer discretionary sector took the worst performer slot as Amazon (AMZN) fell 2% and Tesla (TSLA) fell 5.9%. Growth stocks continued to be a drag on the markets with the Russell 3000 Growth Index falling 1.1% and the Russell 3000 Value Index gaining 0.1%.

CHART OF THE DAY: JUNK YARD DOG. The ICE BofA U.S. High Yield Index (BAMLH0A0HYM2EY:FRED—candlesticks) is trading around 7.5%. The 10-year Treasury Yield (TNX—pink) is near 2.8%. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Cash Flow: The Investment Company Institute’s (ICI) Estimated Long-Term Mutual Fund Flows report shows that investors have favored high-yield bonds as funds have flowed into the asset class over the past few months. In fact, the fixed-income segment saw a large influx of money in December and January despite yields still rising at the time. Meanwhile, investment-grade bonds have seen large outflows since December while government bonds have experienced smaller outflows. In February and March, municipal bonds experienced a surge in outflows as well.

High-yield bonds they have lower ratings due to higher credit risk. Investors get a higher rate of rate return to compensate for the extra risk. According to Yahoo! Finance, close to 20% of the high-yield market is in the energy sector. Rising oil prices have helped to shore up some of the risk associated with energy companies.

Fitch Ratings, which measures and rates bond creditworthiness, reported that high-yield defaults remain low despite an increase in defaults this month.

Europe Flexes: Europe has demonstrated a little bit of strength compared to the United States. Over the last 30 days, the STOXX Europe 600 has fallen a little more than 5% whereas the S&P 500 (SPX) has dropped 8.74%. While no one is happy with the current trend of either index, the STOXX 600 appears to be holding its March low.

Europe was much slower than the U.S. in reopening their economies due to COVID-19, causing its aggregated economy to tip into recession. When Europe is up and running at full strength, it could help to boost the global economy.

Unfortunately, Europe has many risks connected to the Russia-Ukraine war, specifically sanctions on the Russian oil and gas that so much of Europe relies on. Europe doesn’t have good alternatives to Russian energy supplies yet, so they likely have more heavy pulling to do.

Not-So-Happy Meals: After 30 years, McDonald’s MCD announced plans to sell its Russian operations to a local buyer that won’t be able to use the McDonald’s logo. MCD decided that Russia’s invasion of Ukraine has made business in Russia untenable. The company will lose millions on the stores, but it made $5.5 billion revenue in last quarter alone, which should help offset those losses. McDonald’s fell 1.75% on Monday but trimmed those losses to close just 0.41% lower on the day.

Free enterprise is often seen as a uniting force among countries, and it used to be said that countries with McDonald’s stores have never gone to war. Sadly, this isn’t true anymore.