Consumer Spending Still Strong

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Key Takeaways

  • Big Ticket Spending Slowing
  • China Slowing
  • Retail Sales Stay Strong

Heading into Friday, it’s been a relatively quiet week for stocks and futures, with oil being an exception. On an intraday basis, assets have moved around quite a bit but lighter volume has resulted in overall net changes being relatively muted. That could all change next week as we get deeper into earnings season and hear from companies such as Netflix
and Tesla

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The big earnings name this week was JP Morgan Chase. Profits were down 28% from a year ago with much of the fall coming from a sharp drop in mortgage and car loans. That shouldn’t come as too big a surprise as rising interest rates are slowing down purchases of big ticket items. Investment banking fees were also down over 50%, reflecting a slowdown in dealmaking. While customers continue spending, Jamie Dimon again warned of an uncertain future, in light of which, the company announced it was suspending their stock buyback program.

We also heard from both Wells Fargo
and Citigroup
this morning. Wells reported a significant slowdown in mortgages. Second quarter mortgage revenue was down nearly 50% from a year ago. Meanwhile, Citigroup beat on their earnings. In premarket trading, Wells is down slightly, while Citigroup is up a little over $1.

The fall in big ticket spending reported by banks is clearly a result of rising interest rates. Unfortunately, this week’s CPI data, which came in stronger than expected, has the Fed now strongly considering a 1% increase in interest rates when they meet later this month.

We also heard from China this week, where 2Q GDP grew just 0.4%, the slowest rate since 1Q 2020. On a quarter over quarter basis, GDP was down 2.6%. The contraction was driven by lockdowns caused by a resurgence of Covid. Retail sales were especially hard hit in April during the peak of the lockdowns. Sales that month were down 11%.

On a macro level, there are certainly storm clouds but not unprecedented clouds. Rising rates were not only expected, but intended to slow down big ticket spending in order to get inflation under control. The big question moving forward will be whether or not the Fed overshoots on their target to slow inflation, resulting in a “hard” or “soft” landing. So far, despite a slowdown in hiring and targeted layoffs, the overall employment rate remains strong. Consumer spending also appears to be strong as confirmed by today’s retail sales number which came in slightly stronger than expected, up 1% for June vs. expectations of an increase of 0.8%.

Prime Days sales earlier this week jumped over 8% from a year ago. The company reported sales from the two day event reached $12B with over 300 million items being purchased. While that doesn’t tell us if the sales were profitable or not, it does tell me people are still spending, which is a positive.

In premarket trading, futures are indicated to open slightly higher. Oil, which has fallen well below $100 is looking a little stronger in the premarket but remains well off its recent highs, easing pressure on prices at the pump. Also of note, copper is down 35% in last 4 months. Copper is often considered a leading indicator for overall economic health. The significant drop in price is something I’m closely monitoring.

Following today’s close, Alphabet will split 20-1. This could be interesting as it will make the stock price more affordable. While the overall valuation of the company shouldn’t change because of a split, it’s not uncommon for a company to split its stock in hopes of enticing more people to buy.

For retail traders, next week could be when the fireworks start in earnest. In addition to more earnings, we’ll also get data around housing starts and existing home sales. I’ll be closely watching for signs of easing housing prices which would signal an easing in inflation. I’ll also be monitoring earnings, paying particular attention to forward looking statements.

tastytrade, Inc. commentary for educational purposes only.


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