After Retailer Earnings, Investors Fear Not So Resilient Consumer Spending

Barry Adams
21 Feb, 2023
New York City

Market indexes registered the worst day in 2023 after interest rate worries lifted bond yields to a four-month high.

After 3-day weekend, benchmark indexes opened lower and steadily drifted to new lows every hour following the rebound in bond yields and energy prices drifted to new one-year lows. 

The yield on 10-year Treasury notes inched closer to 4.0%, the level seen in last November, after retailers Walmart and Home Depot posted strong results but guided weaker growth. 

The growth outlook from two retail giants put investors on the defensive on the worries that higher interest rates and inflation may have started affecting consumer spending.  

Home Depot fell 6% after the home improvement retailer missed the quarterly revenue estimate and the retailer estimated flat sales in the current fiscal year. 

Investors were also on the backfoot after tensions continued to rise between the two superpowers of the world, U.S. and China.  

U.S. Secretary of State Antony Blinken in an interview on Sunday raised the prospects of "Chinese companies providing non-lethal support to Russia for use in Ukraine." 

Last Saturday, on the sidelines of the Munich Security Conference, the meeting between Secretary Blinken and Chinese Director of the Office of the Central Foreign Affairs Commission Wang Yi failed to calm down the rising tensions. 

Relations between the U.S. and China are at low not seen in decades after China ramps up its military influence in North Asia and tightened its dominance in rare metals markets.  

China has not criticized Russia's invasion of Ukraine and the second largest economic power has a long term ambition to regain control of renegade province Taiwan. 

 

U.S. Existing Home Sales Declined 12th Straight Month  

Existing home sales declined for the twelfth month in a row in January after home affordability kept buyers away. 

Sales of single-family homes, condominiums and co-ops declined 0.7% from the previous month in January to a seasonally adjusted annual rate of 4 million. 

Sales plunged 36.9% from the previous year and median price of a home increased 1.3% from a year ago to $359,000. 

 “Home sales are bottoming out,” said NAR Chief Economist Lawrence Yun. 

“Prices vary depending on a market’s affordability, with lower-priced regions witnessing modest growth and more expensive regions experiencing declines.”

Homes available for sale at the end of January increased 2.1% from December and 15.3% from a year ago to 980,000.

 

U.S. Markets In Review 

The S&P 500 index decreased 2.0% to 3,997.34 and the Nasdaq Composite index dropped 2.50% to 11,492.30. 

The yield on 2-year Treasury notes increased to 4.73%, 10-year Treasury yields jumped to 3.95% and 30-year Treasury bonds jumped to 3.97%.  

Crude oil and natural gas prices declined on the first day of trading this week and natural gas prices dropped below $2 a thermal unit, the first time since September 2020. 

Crude oil declined $1.20 to $75.99 a barrel and natural gas futures declined 16 cents to $2.07 a thermal unit. 

 

Walmart and Home Depot Results Dent Sentiment 

Home Depot fell 6% to $298.77 after the home improvement retailer reported weaker-than-expected quarterly results. 

The retailer said revenue in the fiscal fourth quarter ending in January increased 0.3% to $35.8 billion from the previous year. 

Comparable sales for the fourth quarter fell 0.3% and comparable sales in the U.S. decreased 0.3%.

Net earnings for the fourth quarter were $3.4 billion or $3.30 per diluted share compared with net earnings of $3.4 billion or $3.21 per diluted share a year ago. 

The home improvement retailer said sales and comparable sales growth to be approximately flat compared to fiscal 2022 as consumers shift aways from goods to services. 

Walmart Inc increased 0.7% to $147.56 after the discount retailer reported strong quarterly results as high income consumers search for bargains in the face of high inflation. 

Total revenues in the fourth quarter rose 7.9% to $164 billion and comparable sales in the U.S. rose 8.3% from the previous year and 13.9% from two-years ago. 

Sam’s Club comparable sales  increased 12.2% from a year ago and 22.6% in two years and membership income increased 7.1% to and membership count rose to a record high. 

Total transactions at Walmart U.S. locations increased 1.8% and average ticket size rose 6.3% from a year ago. 

Consolidated net income soared 76% to $6.3 billion from $3.6 billion and diluted earnings per share rose to $2.32 from $1.28 in the previous year. 

The company estimated fiscal 2024 comparable sales at Walmart U.S. locations to grow between 2% and 2.5%, slower than the 6.6% increase in the previous year. 

Consolidated sales in the fiscal 2024 are estimated to rise between 2.5% and 3.0%, compared to 6.7% in the prior year. 

 

Rate Worries Drag European Markets Lower 

Benchmark indexes in Europe closed down after choppy sessions on the worries that high inflation and rising interest rates are beginning to negatively impact consumer spending. 

Despite the two economic reports showing improving business sentiment in Germany and economic activities in the Euro Area, market indexes sold off. 

 

German Economic Confidence Index Rose 5th Month  

Germany's economic sentiment improved for the fifth month in a row in February  to 281. from 16.9 in January, the Manheim-based think tank ZEW said in a report today. 

The Inflation expectations in the Euro Area remained almost constant at a level of minus 83.4 points.

 

Euro Area Business Activities Expanded at Fastest Pace In Nine Months 

The Euro Area business activities rose at the fastest pace in nine months in February after service sector activities improved and the manufacturing sector returned to expansion, S&P Global noted in its purchasing managers' survey Tuesday.

The preliminary composite output index increased more-than-expected to 52.3 in February from 50.3 in the previous month. 

The services Purchasing Managers' Index increased to 53.0, up from 50.8 in January. 

The manufacturing PMI unexpectedly fell to a two-month low of 48.5 from 48.8 in the previous month but the manufacturing output index increased to 50.4 from 48.9 in the previous month. 

Any reading higher than 50 indicates expansion and lower shows contraction in growth rates. 

Swiss international goods trade surplus expanded to Sfr 3.12 billion in January from Sfr 2.82 billion in December, the Federal Customs Administration reported Tuesday. 

In nominal terms, exports increased 2.2% led by a 6.1% rise in chemicals and pharmaceuticals exports followed by a 4.0% increase in shipment of precision instruments. however, jewellery exports dropped 13.1% 

Watch exports rose 8.6% to Sfr 1.9 billion, according to the Federation of the Swiss Watch Industry. 

 

U.S. China Tensions Stay Elevated

Investors were also on the backfoot after tensions continued to rise between the two superpowers of the world, U.S. and China.  

U.S. Secretary of State Antony Blinken in an interview on Sunday raised the prospects of "Chinese companies providing non-lethal support to Russia for use in Ukraine." 

On the sidelines of the Munich Security Conference, the meeting between Secretary Blinken and Chinese Director of the Office of the Central Foreign Affairs Commission Wang Yi failed to calm down the rising tensions. 

 

European Indexes and Yields 

The DAX index declined 0.5% to 15,397.62, the CAC-40 index fell 0.4% to 7,308.65 and the FTSE 100 index dropped 0.5% to 7,977.75. 

The euro edged lower to $1.06, the British pound inched up to $1.2107 and the Swiss franc edged higher to 92.74 U.S. cents.  

The yield on 10-year German Bunds increased to 2.55%, French bonds rose to 3.02%, the UK Gilts to 3.63% and Italian bonds to 4.47%. 

Brent crude oil eased $1.41 to $82.65 a barrel and the Dutch TTF natural gas spot price fell 2.6% to Є48.67 per MWh. 

 

Europe Stock Movers 

HSBC Holdings Plc declined 1.8% to 609.50 pence despite the global bank reported a rise in earnings. 

Fourth quarter revenue increased 24% to $14.9 billion and profit before-tax increased by $2.5 billion to $5.2 billion. 

Estimated credit losses in the quarter jumped to $1.4 billion from $0.5 billion largely because of the exposure to commercial real estate in mainland China and UK corporate loans. 

The company estimated net interest income in 2023 of at least $36 billion and the global bank revised higher credit impairment charges to 40 basis points from 30 basis points. 

In 2022, revenue increased 4% to $51.7 billion and pre-tax income fell by $1.4 billion to $17.5 billion. 

Profit after-tax increased $2.0 billion to $16.7 billion,  including a $2.2 billion credit linked to the recognition of a deferred tax asset.

Intercontinental Hotels Group declined 1.2% to  5,526.88 pence despite the UK-based hotel chain reporting a surge in revenue and earnings and announced a stock repurchase program. 

The company plans to repurchase $750 million of its stock in 2023 and increased its final dividend by 10% to 94.5 U.S. cents, resulting in a total dividend of 138.4 cents. 

Total revenues increased 34% to $3.8 billion and operating income rose 27% to $628 million from the previous year. 

Diluted earnings per share increased to 207.2 cents from 145.4 cents in the previous year. 

 Credit Suisse AG declined 4.2% to Sfr 2.66 after the Swiss Financial Market Supervisory Authority, Finma, said it plans to review the recent statement from the company's chairman Axel Lehman. 

Chairman Lehman had indicated in the statement that the net asset outflows stabilized in December. 

Smith Nephew Plc increased 4.2% to 1,210.50 pence after the company reported a less-than-expected drop in annual profit. 

Fourth quarter revenue increased 1.4% to $1.37 billion from the previous year. 

Revenue in 2022 increased 0.1% to $5.2 billion and operating profit declined to $450 million from $593 million and diluted earnings per share fell to 25.5 cents from 59.8 cents a year ago.