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U.S. Week Ahead (Oct 14-18): Ringing Up September’s Retail Sales

By:

Senior Market Analyst at Interactive Brokers

Investors in the week ahead will receive an update on the health of U.S. retail sales, after some recent concerns about potential trade-related tariff damage ignited corporate earnings fears.

While the strength of the U.S. retail sector has generally remained resilient to recent headline shocks about bankruptcies and restructurings, certain of the U.S.-imposed duties on Chinese imports may now be posing more adverse impacts on domestic retailers, which, in turn, could affect consumer confidence, household spending and, ultimately, overall economic growth.

Market participants have warned that levies on apparel, footwear, consumer electronics, and toys imported from China, for example, will likely impinge on profitability at several major U.S. firms, including sportwear producer Nike (NYSE: NKE), iconic department stores Macy’s (NYSE: M), Kohl’s (NYSE: KSS) and Walmart (NYSE: WMT), as well as electronics giant Best Buy (NYSE: BBY).

Meanwhile, recent Chapter 11 filings of iconic stores such as Forever 21, Barney’s, Gymboree, Diesel and Payless ShoeSource have spurred jitters about the overall health of the U.S. economy – especially since consumer spending accounts for more than two-thirds of gross domestic product (GDP).

However, consumer sentiment remains bright despite the otherwise gloomy backdrop.

The rising popularity of e-commerce, for example, has generally allayed fears about the failings of the traditional brick-and-mortar retail landscape, with mobile ‘swipe-shopping’ increasingly replacing aisle and rack-browsing, while compensating for less rings at physical registers.

The Amplify Online Retail ETF (NASDAQ: IBUY), for instance, which offers equity exposure to global on-line retailers with at least 70% of their revenues from on-line sales, has outperformed the SPDR S&P Retail ETF (NYSEARCA: XRT), with three-year returns of 18.79% compared to -0.94%, respectively.

IBUY includes among its top holdings internet-based mail and shipping service Stamps.com (NASDAQ: STMP), travel tech company Expedia Group (NASDAQ: EXPE) and eBay (NASDAQ: EBAY), while XRT holds firms such as Game Stop (NYSE: GME), Foot Locker and Urban Outfitters (NASDAQ: URBN).

Strong Consumer Appetite Strikes Back

Furthermore, uncertainties over the ongoing impeachment inquiry against U.S. President Donald Trump, as well as developments in trade talks with China and auto union strikes at General Motors (NYSE: GM), seem to be overshadowed by a resurgence of consumer optimism.

It appears shoppers have generally regained their spending appetite after a bout of tariff-inspired stomach cramps in September and despite lingering pessimism about the pace of domestic economic growth.

University of Michigan chief economist Richard Curtin noted Friday that consumer sentiment rebounded in early October, amid expectations for larger income gains and lower inflation during the year ahead. He said that, as a result, “real income expectations rose to their most favorable level in two decades.”

Curtin highlighted that while uncertainties over trade policies have continued to “depress economic prospects, its negative impact has slightly lessened” in the latest consumer survey (cited by 29%, down from 36%). “Importantly, the impeachment inquiry has not had a significant negative impact on economic prospect; it was negatively mentioned by about half as many as negatively mentioned the GM strike (3% versus 5%).”

He added that, overall, the data indicate that “consumption spending will be strong enough to offset weakness in business investment spending so as to keep the economy expanding into 2020,” however a long list of uncertainties will generally keep consumers cautious and focused on “potential threats to their prevailing optimism about inflation, unemployment, incomes, and interest rates as well as foster continued vigilance on the level of their indebtedness.”

Economic Calendar

Against this backdrop, investors Wednesday will receive fresh retail sales figures for September after August’s reading signaled ongoing consumer spending strength.

Wednesday, October 16

  • Retail Sales MoM (Sept)

According to the U.S. Census Bureau, U.S. retail and food services sales for August amounted to a little more than US$526bn, a 0.4% rise over the prior month, and an increase of 4.1% year-on-year.

Retail trade sales were also up 0.6% from July 2019, and 4.6% above last year, while non-store retailers were up 16.0% from August 2018, and motor vehicles and parts dealers were up 6.8% from last year.

Jefferies economists Ward McCarthy and Thomas Simons noted that the non-store retail sales results were “particularly striking because the prior month’s sales were boosted by Amazon Prime Day.

“There was good reason to expect that we would see a decline” in non-store retail sales in August, but instead the figures marked the fourth straight month of “healthy” gains.

Non-store retail sales, a major contributor to the headline number, have been up 2.3%, 2.1%, 1.7%, and 1.6% in each of the past four months.

However, Jefferies also pointed out that, on the other side of the coin, furniture sales fell 0.5%, clothing sales shed 0.9%, department store sales plunged 1.1%, and eating & drinking establishment sales declined 1.2%.

McCarthy and Simons added that the bottom line on the August data is that consumer spending “remains solid and will be a significant source of growth to GDP again in Q3.”

In Q2, the consumer drove headline growth with 4.7% PCE growth, the biggest quarterly increase since Q4 2014 and the second biggest since Q3 2003. Jefferies said that following that up with “a strong Q3 looked to be a tough task, but the early Q3 retail sales data show that the consumer is up to it.”

Investors will likely be watching the upcoming retail sales report for any signs of a shift in consumer spending behavior, amid broader concerns about overall GDP.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

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