Consumers Change Shopping Habits as Inflation Worsens

(Tuesday Market Open) Walmart WMT expressed worries over inflation last night, causing it to tumble in premarket action and pull equity index futures lower.

Potential Market Movers

Walmart surprised investors by slashing its Q2 and full-year earnings guidance due to rising inflation, and its stock plunged more than 9% in today’s premarket trading. As a component of the Dow Jones Industrial Average ($DJI), the Walmart news pulled Dow futures down 116 points, or -0.36%, ahead of the opening bell.

The Walmart news also dragged fellow retailer Target TGT 5.22% lower in premarket action. The news harkens back to last quarter when Walmart and Target warned about high inventories, they needed to unload at lower margins to be ready for the all-important back-to-school and holiday shopping seasons. The latest indicators also reflect changing consumer behavior as they focus on lower-cost items.

Despite the inflation talk, earnings news was mostly positive this morning.

• Coca-Cola KO rose 1.06% in premarket trading after reporting better-than-expected earnings and revenue despite rising costs.
• McDonald’s MCD beat earnings estimates but missed on revenues as the company is still writing off losses related to ending its operations in Russia. The stock increased 0.52% in premarket action.
• United Parcel Service UPS beat on top- and bottom-line numbers but fell 2.25% in premarket trading as shipping volumes have decreased.
• 3M MMM topped estimates for revenues and earnings. It reported that its earplug business was going into Chapter 11 and that it plans to spin off its health care business. MMM was up 4% premarket.
• General Motors GM missed on earnings despite better-than-expected revenues as the company still struggles to get computer chips to its assembly lines.
• Raytheon RTX beat on the bottom line but missed on the top as its defense unit performed shy of expectations. The company hopes to bounce back as itrestocks weapons after shipments to Ukraine. RTX was down 1.70% before the opening bell.

At the start of an intensive week of earnings announcements, three major companies reported after Monday’s close and were positioned to move in premarket trading this morning:

• NXP Semiconductors NXPI reported lower-than-expected earnings despite revenues coming in above consensus. It also raised its forward guidance and gained 1.85% after the market close.
• F5 FFIV beat on top- and bottom-line numbers prompting the cloud security company to rally 6.85% in afterhours trading.
• Whirlpool WHR was able to beat on earnings estimates despite missing on revenues. The stock rallied 1.57% in extended hours trading despite slashing its annual earnings guidance.

After today’s closing bell, Microsoft MSFT and Alphabet GOOGL are set to report results. Normally, an investor might expect these companies to set the tone for the trading day, but the start of today’s Federal Reserve July meeting could overshadow them.

After the market open, investors will get more data on housing with the U.S. Census Bureau’s new home sales report. Also, the CB Consumer Confidence report will be released, which could attract more attention given the Walmart news..

Reviewing the Market Minutes

Stocks were relatively flat on Monday as investors appeared to hesitate ahead of Wednesday’s FOMC interest rate decision. The Nasdaq ($COMP) closed 0.43% lower while the Dow Jones Industrial Average ($DJI) and the S&P 500® index (SPX) respectively rose 0.28% and 0.13%.

The Fed isn’t the only announcement hanging over investors. Durable goods, pending home sales, gross domestic product (GDP), PCE price index, and several big tech company earnings could all move the market before the end of the week.

The energy sector did garner some attention as WTI crude oil futures appeared to bounce off support once again to settle 2.2% higher at $96.80 per barrel. The Energy Select Sector Index climbed 3.72%.

The energy index was also helped by natural gas futures darting 5.2% higher on a report from The Wall Street Journal that Russian gas company Gazprom plans to cut capacity of its Nord Stream 1 pipeline to Germany in half to just 20% from the previous 40% capacity. Gazprom said the move was due to turbine problems.

Last week the European Commission asked the nations of the European Union to cut their gas output by 15% for the next nine months after accusing Russian President Vladimir Putin of “blackmailing” the EU and “using energy as a weapon.”

CHART OF THE DAY: STRETCHING A DOLLAR. The U.S. Dollar Index ($DXY—candlesticks) rose along with the S&P 500 (SPX—pink) through the end of 2021. After the new year, the dollar continued to strengthen while the S&P 500 created a downtrend. A strong dollar hurts companies that have a higher reliance on overseas revenues. 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

WATER IN THE OIL: Despite the strong U.S. dollar, S&P 500 companies with more global exposure are reporting higher earnings growth in Q2. FactSet says that U.S. companies that get more than 50% of their revenues overseas have an average earnings growth rate of 10.2% compared to companies with less than 50% overseas revenue that grew just 1.2%.

However, these overall statistics have been skewed by strong performances from Exxon Mobil XOM and Chevron CVX. When excluding these giants, the growth rate for firms that collect more than 50% of their revenues overseas falls to just 0.5%.

ENGINE HOUSING: The housing market continued to weaken in June according to last week’s reports. The National Association of Home Builders reported that building permits fell 0.6% in June, the biggest drop ever recorded for that month.

According to the Mortgage Bankers Association, the number of mortgage applications fell 6.3% the prior week, showing mortgage demand at a 20-year low.  

The National Association of Realtors reported that existing home sales came in worse than expected, falling for the sixth week in a row.

Despite sliding demand for housing, existing home prices were still up 13.4% year-over-year and sellers were averaging just two weeks to find a buyer.

The housing market is obviously slowing—but is it about to hit the brakes?

RESERVE TANK: Banks have been shoring up their balance sheets by making higher provisions for loan losses. In Q1, the 18 banks in the S&P 500 set aside $1.4 billion as provisions for loans losses. FactSet projected that the number would grow to $4.5 billion in Q2.

While the final numbers aren’t in yet, the banks haven’t disappointed. The nation’s largest bank, JPMorgan Chase JPM, said it set aside $1.1 billion in the quarter while Goldman Sachs GS provided $667 million for loss provisions, Wells Fargo WFC reserved $580 million, Bank of America BAC put aside $500 million while U.S. Bank USB and Morgan Stanley MS reported reserves of $311 million and $101 million respectively. More financials sector results are on the way.

Many analysts were hoping to see a bottom form among banks despite a projected Q2 earnings growth rate of -0.26%. So far, the PHLX KBW Bank Index ($BKX) is still trading below its May lows despite rising more than 6% for the month. However, higher provisional loss reserves tend to be a negatively correlated with bank earnings according to FactSet.

Notable Calendar Items

July 27: Durable goods orders, Pending home sales, FOMC interest rate decision and earnings from Meta META, Qualcomm QCOM, Rio Tinto RIO, Boeing BA, and Automatic Data Processing ADP

July 28: Gross domestic product (GDP) and earnings from Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Mastercard MA, Intel INTC, and Caterpillar CAT

July 29: PCE Price Index and earnings from Exxon Mobil XOM, Procter & Gamble PG, and Chevron CVX

Aug 1: ISM Manufacturing PMI and earnings from Activision Blizzard ATVI, Simon Property SPG, Devon Energy DVN, and Aflac AFL

Aug 2: JOLTS job openings and earnings Archer Daniels Midland ADM, Caterpillar CAT, PayPal PYPL, Starbucks SBUX, and Occidental Petroleum OXY

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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