U.S. Retail Sales Rise Steadily

Total retail sales including food service establishments increased 0.3% (4.4% y/y) during January following a 0.2% December gain, revised from 0.3%. The increase matched expectations in the Action Economics Forecast Survey. Retail sales excluding motor vehicles & parts also rose an expected 0.3% (4.0% y/y) last month after a 0.6% increase in December, revised from 0.7%.

Retail sales alone edged 0.1% higher (4.0% y/y) following no change last month, which was revised from 0.4%. A 3.1% decline (0.0% y/y) in apparel store sales weakened the result as it followed December’s 2.7% jump. A 2.1% (-1.3% y/y) rise in building materials store sales offset most of this weakening. Motor vehicles purchases improved 0.2% (5.7% y/y) as unit sales of light vehicles (reported earlier this month) rose 1.1%. Nonstore retail sales increased 0.3% (8.4% y/y) after four straight months of decline. (…)

Restaurant sales increased 1.2% (7.4% y/y), the same as in December, which was revised from 0.2%.

Generally good numbers except for “control sales” that feeds right into the personal consumption segment of GDP (excludes autos, gas & building materials): they were unchanged in January (consensus +0.3%) but there was a significant revision to December to +0.2% from +0.5% and to November from –0.1 to –0.2.

These revisions, particularly December’s, radically change the retail trade picture to a rather slow growth sector starting in August: +0.2%, -0.3%, -0.0%, -0.2%, +0.25%, +0.0%. Total last 6 months: –0.11% vs booming sales since September 2018.

On a YoY basis, control sales are still up 4.4% in January but even if monthly growth was 0.2% from now, August 2020 sales would merely be up 2.0% YoY, in line with core inflation.

In effect, the revised data suggest that consumer spending was weaker than what the initial Q4 GDP released showed and that the “hand off” to Q1’20 is rather weak.

So, beware of headlines such as Haver Analytics’ “U.S. Retail Sales Rise Steadily” or the WSJ’s “U.S. Consumer Spending Picks Up”. We should all hope they will use the same headlines in coming months.

Here’s the trend in real Retail and Food Services Sales: actually down from August level.

Retailers are facing very tough comparisons from a year ago, when consumer spending was robust and the sector posted strong same store sales (SSS) in Q4 2018. The Refinitiv SSS index is expected to see 2.4% growth in Q4 2019. A 3.0% SSS reflects healthy consumer spending. The 2.4% SSS estimate is below the 4.1% result seen in Q4 2018. (Refinitiv)

Refinitiv Same Store Sales Index: 2017 – Present

The Earnings Watch section below has more on retailing.

BTW, from Bespoke:

737 MAX and Utilities Push U.S. Industrial Production Lower

Industrial production decreased 0.3% in January (-0.8% year-on-year) following offsetting revisions to November and December — now +0.9% and -0.4% revised from +0.8% and -0.3% respectively. The Action Economics Survey forecast a 0.3% decline in January.

Manufacturing activity edged down 0.1% (-0.8% y/y) during January, with a slight downward revision to December (now 0.1% versus 0.2%). Utilities production fell 4.0% (-6.2% y/y), as much warmer-than-normal weather in January decreased demand. U.S. population-weighted heating was 176 degree-days below normal. The only warmer January by this measure occurred in 2006. Meanwhile mining activity rose 1.2% (3.1% y/y).

Manufacturing of durable goods declined 0.5% (-0.8% y/y) in January, with aircraft production plunging 10.7% (-10.2% y/y). This 737 MAX production-halt-related drop is the largest non-strike driven decline in aircraft output. (…)

Output of business equipment, an indicator of capital spending, fell 2.6% in January (-4.5% y/y). In the special aggregate groupings, production of high technology products, which is now less than 2% of total output, increased 0.8% (8.9% y/y). Factory sector production excluding the motor vehicle and high tech sectors decreased 0.3% (-1.1% y/y), and remains 11% below its 2007 peak.

U.S. Core CPI and JOLTS Job Openings

Another interesting correlation with slumping job openings (BCA Research).

Japan’s Economy Shrinks 6% as Sales-Tax Rise Cools Consumption In Germany, central bank said it sees no sign of improvement in the first-quarter growth outlook

Japan, the world’s third-largest economy after the U.S. and China contracted at an annualized rate of 6.3% in the October-December quarter, worse than economists’ forecast of a 3.9% contraction. The biggest reason was a sharp drop in private consumption after the national sales tax rose to 10% on Oct. 1 from 8%.

“Because of the effects of the novel coronavirus, weakness in consumption will likely continue in the January-March period. Exports and production could be dreadfully weak as the supply chain is interrupted,” said Daiwa Securities economist Mari Iwashita. (..)

Chinese accounted for about 37% of the $44 billion in spending by tourists in Japan last year. (…)

The Bundesbank said a temporary decline in China’s economy is likely to damp German exports. “In addition, some global value chains could be affected by the security measures taken. Delivery bottlenecks in individual industries in Germany would be the result,” it said.

The Bundesbank called on the government to spend its large surplus to provide a boost, a shift for an economically conservative institution that had until recently pushed back against international demands that Germany loosen its purse strings. (…)

Singapore said Monday it was downgrading its growth forecast for 2020 to a 0.5% contraction to 1.5% growth because of the coronavirus outbreak, which has led to a sharp decline in tourist arrivals. In November, before the outbreak, the city-state’s government had projected growth of 0.5% to 2.5%. Singapore’s Ministry of Trade and Industry said China’s slowdown would have an impact across Southeast Asia due to supply-chain disruptions and reduced Chinese import demand.

Malaysian officials said Friday that the government would announce a stimulus package later this month to assist businesses. (…)

China’s Shipping Nears a Standstill Amid Coronavirus Disruption Executives say large container ships are leaving Chinese ports as little as 10% full, and sailings are being canceled as carriers brace for a financial retreat

(…) Mr. Jensen said the canceled trips, which have topped 50 since late January, will delay or reduce shipments into the U.S., where retailers may see a slowdown in their traditional restocking of inventories for the spring.

Five European and Asian container ship operators told the Journal they are preparing profit warnings for the first half or the full year. (…)

Sea-Intelligence said in a report this week that more than 350,000 containers have been removed from global trade since the outbreak of the virus (…)

A group representing U.S. agriculture exporters warned its members this week to ensure that ocean carriers can store their goods on arrival in China, particularly items like meat, vegetables and fruit that require refrigeration. American exporters are seeing cargo backed up even at U.S. hubs because of the congestion in China’s distribution networks.

Brokers said crude and natural gas shipments are down by nearly half across China’s main ports. Daily freight rates for big crude tankers have fallen to between $10,000 and $40,000, from up to $80,000 at the start of the year. (…)

The China Association of the National Shipbuilding Industry said more than 200 deliveries of ships under repairs or retrofitting could be pushed back. China is the world’s biggest shipbuilder, with more than 960 vessels set to be delivered this year, according to data provider VesselsValue. (…)

Infection Cases Top 73,000: Virus Update The WHO has said it’s too early to say if infections are truly declining.

• China death toll 1,868; mainland cases rise to 72,436
• Hubei reports 1,807 new cases; 93 more deaths

EARNINGS WATCH

From Refinitiv/IBES:

Through Feb. 14, 387 companies in the S&P 500 Index have reported earnings for Q4 2019. Of these companies, 71.6% reported earnings above analyst expectations and 18.9% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 19% missed estimates.

In aggregate, companies are reporting earnings that are 5.2% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 4.9%.

Of these companies, 65.5% reported revenue above analyst expectations and 34.5% reported revenue below analyst expectations. In a typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters, 58% of companies beat the estimates and 42% missed estimates.

In aggregate, companies are reporting revenue that are 1.1% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 1.0%.

The estimated earnings growth rate for the S&P 500 for 19Q4 is 2.6% [+2.3% last week]. If the energy sector is excluded, the growth rateimproves to 5.5% [+5.1%]. The estimated revenue growth rate for the S&P 500 for 19Q4 is 5.1% [+5.0%]. If the energy sector is excluded, the growth rate improves to 6.4% [+6.2%].

Overall a pretty good earnings season with no signs of weakening, so far. Guidance for Q1’20 is also quite upbeat. Fifteen more companies than usual have pre-announced Q1 so far and virtually all of them were positive. But the virus is still doing its damage…

And analysts keep revising down:

The estimated earnings growth rate for the S&P 500 for 20Q1 is 3.8% (+4.0% last week and +6.3% on Jan. 1). If the energy sector is excluded, the growth rate
declines to 3.6% (+3.7%).

Trailing EPS are now $164.54, finally resuming a slight upward trend interrupted last June. The current overvaluation can only correct in one of two ways: either the market corrects towards its R20 equilibrium or the R20 Fair Value (yellow line) spikes back up to close the current 15% overvaluation. This latter event happened in 2017-18 thanks to the tax reform, but not preventing the late 2018 10% overvaluation to get nastily corrected by Dec. 24. Forward looking earnings are virus-vulnerable…

Retailing:

Retailers are getting ready to report Q4 earnings and have been actively discussing the coronavirus issue over the past two weeks. To date, there have been nine negative EPS pre-announcements for Q1 2020 compared to three positive preannouncements.

Likewise, when looking at revenue, there are more negative than positive pre-announcements. About 30% of this negative guidance is coming from footwear, including Nike, which said last week that in the short term, they expect the situation to have a material impact on its operations in greater China. (Refinitiv)

Exhibit 2: The Refinitiv Retail Earnings/Revenue Guidance – Q4 2019 and Q1 2020

• Apple Warns Virus Will Hurt Sales Apple became the first major U.S. company to say it won’t meet its revenue projections for the current quarter due to the coronavirus outbreak, which it said had limited iPhone production and curtailed demand in China.

Apple said its contract manufacturers were ramping up production “more slowly than we had anticipated.” As a result, it said that there would be iPhone supply shortages that temporarily affect world-wide sales. It also said the closure of its own stores and many partner stores across China had affected sales of its products. (…)

The company said that outside of China demand for its products and services had been strong and in line with expectations. (…)

Foxconn is aiming to resume 50% of mainland China production by the end of February, and 80% in mid-March, another person familiar with the matter said. (…)

(…) Volkswagen AG said Monday it would postpone production restarts at some Chinese plants for another week. Fiat Chrysler Automobiles NV said last week it temporarily halted production in Serbia because it couldn’t get parts from China, which continues to deal with manufacturing delays as it seeks to contain the spread of the virus. (…)

Walmart misses on fourth-quarter earnings as guidance shy of forecast

Walmart said its fiscal fourth-quarter ending Jan. 31 net income rose 12% to $4.14 billion, or $1.45 a share, as revenue rose 2.1% to $141.67 billion and U.S. comparable-store sales rose 1.9%. Excluding items including unrest in Chile, Walmart said it would’ve earned $1.38 a share. Analysts polled by FactSet expected earnings of $1.44 on revenue of $142.5 billion. For fiscal 2021, it expects adjusted EPS between $5 and $5.15, sales growth of 3% at constant currencies, and Walmart U.S. comparable store sales growth of 2.5%. Analysts expected earnings of $5.21 for the fiscal 2021 year. (…)

TECHNICALS WATCH

Lowry’s Research notes a number of indicators that, over the past 2 weeks, “showed a small degree of potential underlying weakness.” It cites primarily the increasing narrowness of the equity market, “the steep outperformance of Large Cap stocks, and specifically Tech stocks that dominate capitalization-weighted indexes such as the S&P 500 and NASDAQ-100. (…) [However], “without significant increases in Selling Pressure, and further deterioration in breadth and intensity, any correction is likely to be short-lived and provide further opportunities for deploying new money.”

It may be appropriate to recall some of Bob Farrell’s time-tested Ten Rules:

• 1. Markets tend to return to the mean over time
• 2. Excesses in one direction will lead to an opposite excess in the other direction
• 3. There are no new eras — excesses are never permanent
• 4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
• 7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

Smaller cap stocks continue to lag. These RBC Capital charts are self-explanatory. It sure seems like the tax reform and the trade war have disproportionately benefitted large companies.

HSBC Plans to Cut 35,000 Jobs, $100 Billion of Assets Europe’s biggest bank said it plans to scale back its operations in the U.S. and mainland Europe, as well as its investment bank, as it reported a sharp fall in net profit

U.S. to Raise Tariffs on EU Aircraft The Trump administration said it would increase tariffs on aircraft coming from the European Union, as its dispute with the bloc over subsidies for plane manufacturers remains unresolved.

Beginning March 18, airplanes from France, Germany, Spain and the U.K. will be subject to 15% tariffs, up from a 10% tariff that took effect in October.

The U.S. initially was authorized to impose the tariffs by a ruling at the World Trade Organization following a 15-year legal battle with the EU over support programs for aircraft manufacturers Airbus SE and its U.S. rival, Boeing Co.

As part of the dispute, the U.S. trade representative also imposed tariffs in October on a range of EU food products, including certain wines, cheeses and olives. Those tariffs were set in October at 25% and weren’t raised on Friday. The USTR has said about $7.5 billion worth of goods are affected by the tariffs, a figure which was unchanged by the latest action. (…)

The WTO decision allowed tariffs as high as 100% to be imposed. The USTR’s office had threatened a wide range of products from Europe with the maximum tariff, prompting an outcry from industries that could be affected. But the USTR opted on Friday for a more modest increase in aircraft tariffs and no change to others.

“The United States remains open to a negotiated settlement that addresses current and future subsidies to Airbus provided by the EU and certain current and former member States,” the USTR said in a statement. (…)

The WTO is expected to rule later this year on a related case brought by the EU against U.S. subsidies of Boeing. At that point, the EU will be authorized to strike back with tariffs of its own. The USTR said Friday it may still change its tariffs “immediately upon any EU imposition of additional duties on U.S. products” as part of the dispute.