Investors are anxious to see earnings from retailers Target and TJX today after the big Home Depot disappointment. In case you missed it yesterday, Home Depot, which reported its worst revenue miss in 20 years and cut its full-year outlook. Executives at Home Depot said spending on home improvements has cooled sharply this year, prompting the retailer to warn that its annual sales will decline for the first time since 2009.

Target's earnings and guidance today should provide a more broad snapshot of general consumer discretionary spending. Worries that consumer budgets are becoming overly strained were also compounded yesterday by a lower-than-expected gain in Retail Sales. There's no question in my mind that the US consumer has over spent in the past couple of years, the question is how will it end.

Consumer spending accounts for some two-thirds of the US economy, worries about recession naturally arise when they start to pull back or get a bit too far in debt. At the same time, there is room to cheer slower consumer spending as it should act as an additional "disinflationary" force and is among the key things the Federal Reserve is aiming for.

Stock bulls are still betting that the Fed's benchmark rate will work lower before the end of the year but as several officials have pointed out this week, there is still a possibility that rates could climb even higher if the central bank isn't convinced that inflation is under control.

With inflation still high and numerous signs that the economy is slowing, the current economic trend is bordering on "stagflation," one of the worst possible environments for corporate earnings.

The S&P 500 and Nasdaq indexes are still holding on to gains this year of +7.0% and +17.9%, respectively, but the gains are not rooted on widespread support. The gains stem mostly from big tech stocks, which is a big reason why the Dow is back in negative territory (-0.4%).

In fact, on an equal-weighted basis, the S&P 500 is about flat for the year. Meaning if tech tumbles and the rest of the market follows, things could get ugly very quickly. However, Wall Street traders also point out that if the worst-case-scenarios are avoided and indexes do push higher, it may not be led by the tech sector where companies like Apple and Microsoft are already up more than +30% this year.

Aside from Target and TJX, Cisco Systems is the other key earnings result on the calendar today.

On the economic data front, today's key release is Housing Starts and Building Permits for April. Turning to Washington, debt ceiling talks at the White House did not result in a resolution but GOP House Speaker Kevin McCarthy did say a deal is possible by the end of the week.

The Dramatic Shift in Mortgage Origination and Refinancing: During the first quarter of this year new mortgage originations, including refinancings, totaled just $323.5 billion, the lowest level since the second quarter of 2014. The total was -35% lower than in the fourth quarter of 2022 and -62% below the same period a year ago. New home loans peaked at $1.22 trillion in the second quarter of 2021 and have fallen since interest rates have increased. With the mortgage refinancing boom over, many feel its impact will be seen for decades to come, according to Andrew Haughwout, director of household and public policy research at the New York Fed. Fed data shows that about 14 million mortgages were refinanced during the pandemic period starting in March 2020. Some 64% were considered “rate refinances,” or homeowners looking to take advantage of lower borrowing costs. According to the New York Fed, average savings totaled about $220 per month for those borrowers. Source CNBC

Long Big Tech is the Most Crowded Trade, BofA Survey Shows: The mood among global fund managers soured further in May, with investors flocking to cash amid concerns that a recession and credit crunch are looming, according to Bank of America Corp.’s latest survey. The sentiment among fund managers deteriorated to the most bearish this year, with 65% of survey participants now expecting a weaker economy, BofA’s poll showed. At the same time, almost two thirds of investors see a soft landing as the most likely scenario for global economic growth and expect only a small contraction in earnings. While cash levels rose to 5.6% in May, exposure to equities also climbed to the highest this year, while bond allocations are now the biggest since 2009, according to BofA. In a “flight to safety,” allocation to technology shares saw the biggest two-month increase since the global financial crisis and being long big tech is the most crowded trade. After long big tech, the most crowded trades include short US banks and short US dollar. The survey also showed a big rotation out of commodities, utilities, and into tech stocks — highest since December 2021 — and euro-zone equities. Investors are the most long growth versus value stocks since July 2020. A bank credit crunch and global recession are seen as the top tail risks, followed by high inflation keeping central banks hawkish, worsening geopolitics, and a systemic credit event. Source Bloomberg

Unusually Terrible Freight Market May Get Worse: The National Truckload Index (NTI), which measures the average national truckload spot rate, is $1.49 a mile, breaking below the 2019 seasonal equivalent. While extremely low rates are bad enough on their own, the worse news is that operating costs for trucking companies (not including fuel) are up more than 30 cents a mile in that same period. On a cash flow-adjusted basis, current spot rates are equivalent to $1.19 a mile, without including any increases in the cost of capital to finance operations. Freightwaves notes that thousands of small carriers have revoked their operating authority, but they are yet to see a rash of bankruptcies in the truckload industry. So far in 2023, FreightWaves has reported on only seven bankruptcies, a little more than one a month. A lot of the weakness in trucking is related to the expansion of capacity over the past few years. The total number of registered Class 8 vehicles in the over-the-road truckload industry grew from 1.47 million in February 2020 to 1.7 million as of April 2023. This +16% increase in capacity is a primary reason that freight feels so soft in the carrier community. Volumes, on the other hand, are relatively stable, at least for now. Source Frieghtwaves

Views on US Housing Market Sink to New Low: Twenty-one percent of U.S. adults believe it is a good time to buy a house, down nine percentage points from the prior low recorded last year. The 2022 and 2023 readings are the only times that less than half of Americans have perceived the housing market as being good for buyers in Gallup’s trend since 1978. The latest results are from Gallup’s annual Economy and Personal Finance poll, conducted April 3-25. Seventy-eight percent currently say it is a bad time to buy a house. Opinions of the housing market are bleak and generally similar among all major subgroups, including by region, urban/city, homeownership status, income, education, and party identification. As home prices have begun to fall in many areas of the country, to a median of $436,800 in the first quarter of 2023, fewer Americans expect home values in their area to rise in the coming year. Currently, 56% hold this view, while 25% believe prices will stay the same and 19% think they will decrease. Despite the declines this year, current expectations for home prices are still relatively high. In 2020, 40% thought home prices would increase, and from 2009 through 2012, after the housing bubble burst, between 22% and 34% did. Source Gallup

White House to Invest Nearly $11 Billion for Renewable Energy in Rural Areas: The Biden administration on Tuesday announced nearly $11 billion in grants and loans to help rural energy and utility providers bring affordable clean energy to their communities across the U.S. Department of The Empowering Rural America program makes $9.7 billion available to eligible rural electric cooperatives to deploy renewable energy systems, zero-emission and carbon-capture systems. Rural electric cooperatives, which serve 42 million people across the country, will be eligible to apply for grants starting July 31, the USDA said. Source CNBC

Biden Administration Grants Mountain Valley Pipeline Permit: The Biden administration has approved a permit to allow the Mountain Valley natural gas pipeline to run through the Jefferson National Forest straddling Virginia and West Virginia, Senator Joe Manchin said on Tuesday. Manchin, a conservative Democrat of West Virgina, has introduced a bill to speed fossil fuel and renewable energy projects that calls on the administration to approve Equitrans Midstream Corp's $6.6 billion Mountain Valley pipeline. The Biden administration has supported Manchin's bill as it would help renewable energy companies reap the benefit of billions of dollars of tax credits contained in last year's Inflation Reduction Act. The Mountain Valley Pipeline has been opposed by environmental activists. Source Reuters

Russia Hasn’t Made Its Pledged Crude-Output Cuts, the IEA Says: Russia promised to cut crude oil production by -500,000 barrels a day in March and maintain the curbs for the rest of the year in retaliation for Western sanctions. While Russia’s Energy Ministry said the cuts were close to that target last month, tanker-tracking data have shown record export volumes by sea while domestic crude processing is only beginning to drop amid refinery maintenance. Meanwhile, the government in Moscow has classified oil statistics due to their “sensitive” nature, making it difficult to assess progress of the curbs beyond the assurances of energy officials. Russia’s crude production in April was about 9.6 million barrels per day, the IEA said in its monthly report on Tuesday. That’s only 200,000 barrels below the February baseline for the cuts, according to the agency. “By our estimates, Moscow did not deliver its announced 500,000 barrel-a-day supply cut in full,” the Paris-based IEA said. “Indeed, Russia may be boosting volumes to make up for lost revenue.” The country’s oil-export revenue rose by +$1.7 billion to $15 billion in April, but was still down by -27% from a year earlier, according to the report. Source Bloomberg

Exploding Air Bags Prompt Feds to Demand Massive Recall: Federal vehicle-safety regulators are calling for a recall of air-bag inflation devices that would trigger one of the largest safety actions in U.S. history, citing at least two deaths and eight injuries. The maker of the devices says it doesn’t believe a recall of that scope is necessary. Last week, the National Highway Traffic Safety Administration made public its demand that Tennessee-based ARC Automotive recall about 67 million air-bag inflators because of a risk they could explode in a crash and spray the car’s interior with metal shrapnel. NHTSA’s conclusion came nearly eight years after it began investigating the potentially faulty inflators. It also coincided with General Motors’ decision last week to recall about 1 million SUVs to have their air bags replaced, by far the largest recall related to the alleged defect. The regulator agency made public a letter it sent to Tennessee-based ARC, demanding that it recall 67 million inflators, which the agency said were used in vehicles sold in the U.S. by at least 12 automakers in models made between 2000 and early 2018. Source WSJ

Organic Food Sales Hit New Record in 2022: Organic food sales in the United States surpassed $60 billion in 2022, according to the Organic Trade Association (OTA), showcasing continued growth for the category even during an inflationary period. According to the group’s 2023 Organic Industry Survey, total organic sales, including organic nonfood products, were a record $67.6 billion. Organic product sales grew at a +4% rate, doubling the pace of growth in 2021. Sales of organic produce totaled $22 billion, making it the largest subcategory and accounting for 15% of all fruit and vegetable sales in the U.S. Organic beverages were the second best-selling organic category, reporting $9 billion in sales in 2022, up +4% compared to 2021. The third highest-selling organic category in 2022 was dairy and eggs, hitting $7.9 billion last year, an increase of over +7% from 2021. Organic dairy and eggs made up close to 8% of the total dairy and egg market according to OTA’s data. Source

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