Earnings from US retailers: How does inflation affect consumption? Is the interest rate hike expected to regenerate suspense?

　　Affected by the fall in energy prices, U.S. inflation fell more than expected in July, which also eased the Fed's policy pressure to a certain extent.

　　From this week, large US retailers will disclose their second-quarter earnings reports one after another. Judging from the performance warning issued by Walmart, the impact of prices on consumer shopping behavior is emerging. At the same time, the impact of tightening policies is also causing demand to slow down.

The retailer's latest guidance is expected to draw widespread attention, as consumer dynamism, the engine of the U.S. economy, is critical to the Fed's ability to deliver a soft landing.

Large retailers under pressure

　　The impact of inflationary pressures on large retailers carried over from the first quarter to the second quarter.

The world's largest retailer, Walmart, issued a performance warning last month. The adjusted EPS in the second quarter is expected to decline by about 8% to 9%. It was previously expected to be flat to a slight increase. The adjusted EPS for the full year is expected to decline by about 11%~ 13%, compared with expectations for a 1% decline.

High prices have caused consumers to spend more on essentials such as food and less on goods such as clothing and electronics.

However, this mix of consumption has created significant inventory pressure and will impact the company's performance, as food has lower profit margins than non-essential items like TVs and clothing.

　　Another retail giant, Target, announced in early June that it would take measures, including price cuts, to reduce excess inventory.

Target CEO Brian Cornell said at the time that the company had expected a slowdown in demand after the end of the government stimulus, but was caught off guard by the magnitude of the cooling in actual consumption.

　　Affected by factors such as supply chain bottlenecks and supply-demand imbalances, consumers are increasingly feeling the rising tide of prices.

Customers who mentioned "inflation" in their reviews hit a record high in the second quarter, up 7% from the previous quarter and up 28% year-over-year, according to a report released this month by review platform Yelp.

Statistics show that the use of phrases such as "higher price" and "cheaper in the past" have soared for five consecutive quarters since the beginning of 2021.

At the same time, consumer reviews mentioned the phenomenon of "shrink flation", which mainly refers to the shrinking of product size, but the price remains unchanged, and merchants hope to alleviate consumers' poor shopping experience through this strategy.

　　According to the schedule, a number of large retailers, including Wal-Mart and Home Depot, will release their results this week. It is worth paying attention to how consumers respond to inflationary pressures, and the presentation of performance guidance will undoubtedly attract more market attention.

It is worth noting that although the US consumer price index (CPI) fell from a 41-year high of 9.1% to 8.5% in August, food-related inflation continued to accelerate, rising 11% month-on-month in July and 10.9% year-on-year to 1979 This is the highest level since May 2019, which may mean that U.S. households still need to weigh the consumption of essentials and discretionary goods.

　　Goldman Sachs believes that commodity price (inflation) data will not see a major pullback, at least in the short term.

On the one hand, many companies have disclosed price increases plans, and some discounts are also hedged by broad price increases.

At the same time, consumers are turning to cheaper alternatives, but the CPI data only cares about price changes, not changes in market share.

　　A loosening of the labor market is also a potential hazard.

For the Fed, employment is a sign of the health of the U.S. economy.

In the past year, due to the huge labor vacancies, companies have attracted job seekers by raising wages and other means, which has also provided new momentum for consumption.

However, recent warning signs have begun to emerge. The number of Americans filing for unemployment benefits rose to 262,000 last week, the highest since November 26 last year, indicating a continued slowdown in the labor market.

Continuing claims have also started to pick up and are now at their highest level in more than four months.

Corporate layoffs are also starting to emerge, with reports last week that Best Buy, the largest U.S. consumer electronics retailer, is making changes across the U.S. to cut costs and boost profits.

The company has reduced the number of employees at its retail stores, as well as some jobs that help customers plan and buy home entertainment products.

　　For the Fed, cooling the overheated labor market is an important factor in reducing inflation, because labor costs are often a A stickier source of inflation.

What the Fed would most like to see, he argues, is that labor market weakness will come in the form of falling job openings, rather than layoffs, which tend to signal a rapidly deteriorating economy.

Under the pressure of the current economic slowdown, further tightening of monetary policy by the Federal Reserve will undoubtedly bring further uncertainty to the job market and impact consumption and economic momentum.

Borrowing money for consumption and soft landing dilemma

　　The price factor began to make many Americans begin to borrow money to consume.

Americans' credit card balances rose by $46 billion in the second quarter, up 13% from a year earlier, the highest in nearly 20 years, according to the New York Fed.

"The second quarter saw strong growth in mortgages, auto loans and credit card balances, in part due to higher prices," said Joelle Scally, director of the New York Fed's Microeconomics Data Center. "While overall household balance sheets appear to be in good shape, Delinquency rates have risen for low-income borrowers."

　　“The biggest headwind for consumers is price inflation and higher interest rates,” Richard Fairbank, chief executive of consumer finance giant Capital One, said on a quarterly earnings call last month. “Inflation could erode consumer spending here. The excess savings built up during the pandemic, especially if price increases continue to precede wage increases." He added that higher interest rates are also pushing up interest costs on consumers' monthly bills.

　　JPMorgan believes that these phenomena illustrate that consumers are beginning to capitulate amid persistent inflation headwinds and the loss of savings accumulated during the pandemic.

　　Compared with the challenges faced by large supermarkets, discount stores and discount retailers have continued to be favored by consumers this year.

Placer.ai, a location data analysis service provider, found that from June 1 to July 25, passenger traffic in 3,573 U.S. supercenters dropped by an average of 2.7% year-on-year.

By comparison, German supermarket chain Oleqi saw a 11.5% increase in traffic over the same period, and Dollar General's traffic increased by 4.1%.

　　Combined with recently aggregated data, Wall Street institutions expect consumer momentum to show signs of slowing.

FactSet said the upcoming July retail sales rate fell sharply to 0.2% from the previous 1%, with Citi and Bank of America expecting retail sales to turn from up to down.

Schlossberg told Yicai that as inflation continues to rise, people pay more and more attention to cost-effectiveness, and the continuity of consumer spending is showing signs of exhaustion.

Price pressures have greatly affected real disposable personal income, especially among low-income groups.

He believes that the future direction of household savings rates will have a major impact on economic growth prospects.

　　Several Fed officials have also reiterated their hawkish stance on inflation in public speeches recently.

San Francisco Fed President Mary Daly said the Fed's fight against inflation is "far from over."

Richmond Fed President Thomas Barkin (Thomas Barkin) believes that although the CPI in July is welcome, the Fed should continue to raise its benchmark interest rate until data shows that inflation continues to improve.

The probability of a 75-basis-point rate hike in September remained at 31 percent on Monday, according to FedWatch, a CME interest rate watch tool.

　　The UBS Wealth Management Investment Director's Office (CIO) believes that from the 2/10-year yield curve is still deeply inverted, recession fears are growing.

Falling household saving is supporting consumer spending, with a future soft landing contingent on stabilizing real wages before saving runs out.

In this case, less saving (or more borrowing) would support the economy until changes in real income no longer weigh on consumption.

If inflation can drop significantly in the future, the economy is likely to achieve the goal of a soft landing.