THE DAILY EDGE: 22 MAY 2019: The Front Line

A VISIT ON THE FRONT LINE

Retailers’ Sales Lag as They Gird for Tariffs Kohl’s, J.C. Penney, Home Depot fall short of analysts’ estimates, plan for impact of higher duties on Chinese merchandise

Retailers are on the front line of this trade war. They need to prepare because they get hit first.

Kohl’s Corp. KSS -12.34% , J.C. Penney Co. JCP -6.96% , and Nordstrom Inc. JWN 1.04% reported declines on Tuesday, while Home Depot Inc. HD 0.26% posted a weaker-than-expected 2.5% rise in comparable-store sales. (…)

Kohl’s, which imports about a fifth of its goods from China, said Tuesday that additional costs related to rising import tariffs prompted it to lower its guidance for the year.

Already?

Home Depot finance chief Carol Tomé said the home-improvement chain estimates it will spend about $1 billion more to buy goods with the 25% tariffs in place, coming on top of the roughly $1 billion in costs added by the 10% tariff.

The company said it plans to manage the cost increases by buying more volume at lower prices from some vendors and by spreading price increases across a wider swath of items to limit the impact on sales. (…)

$1B + $1B = $2B on $110B in revenues = 2% hit. HD’s pretax margin was 13.5% in 2018, suggesting a potential 15% profit drop. What HD says is that it will ask suppliers to take some of the hit and will spread the rest across the entire store to mitigate the impact on Chinese import prices. No doubt HD will also ask non-Chinese suppliers to participate. Collateral damage that will spread across the whole economy, hit small companies harder and hurt lower income consumers the most.

Last week Walmart executives said they will likely raise some prices in the face of tariffs, but are managing cost increases product by product.

(…) And purchases of products like auto parts that are needs, not wants, are less likely to decline because of tariff-induced price increases. (…) Around 30% to 45% of auto-parts sales originate from China, Wells Fargo said in a report. (…)

Kohl’s shares fell more than 12% on Tuesday, and Penney’s fell about 7%. Shares of Home Depot and TJX Co TJX 0.55% s, which also posted results, rose slightly. In after-hours trading, shares of Nordstrom, which reported results after the market closed, fell more than 8%. (…)

Home Depot isn’t seeing any signs of consumer weakness (…) It said sales are picking up with warming weather, and the retailer maintained its guidance for the year. (…)

Other battle lines:

• World trade is dangerously slumping (Charles Schwab)

• Schwab’s excellent Liz Ann Sonders:

(…) As we’ve been opining for some time, although the impact to-date of the trade war has not been substantial in terms of either economic growth or inflation, if it continues to heat up, the impact will be increasingly felt. The indirect effect has already kicked in; with hits to “soft economic” data like business confidence and capital spending intentions. The reason we continue to believe trade will be an important determinant of the length of runway between now and the next recession is because of this confidence transmission mechanism.

The fiscal stimulus of last year helped boost animal spirits through the business confidence channels; along with hopes for a capex-led next leg to the economic expansion. Absent a comprehensive trade deal, it’s hard to imagine a scenario where those animal spirits are reignited.

• US companies face retaliation in China as trade war deepens Survey shows nearly half hit by counter-measures from Beijing leading many to cut investment or relocate

• Steve Bannon says killing Huawei more important than trade deal with China Trump’s former strategist says he won’t stop there, with plans to exclude all Chinese companies from capital markets

• Apple’s China Business Faces Another Blow From Trump’s Huawei Ban The ban could hobble iPhone sales in the world’s biggest smartphone market and disrupt Apple’s supply chain.

(…) Apple could lose nearly a third of its profit if China retaliated by banning its products, Goldman Sachs analysts estimated this week. Dan Ives, an analyst at Wedbush Securities, said 3% to 5% of iPhone sales in China may disappear over the next 12 to 18 months because of the U.S. ban on Huawei.

Apple would face much more dire consequences if production restrictions were implemented in China, Goldman analysts led by Rod Hall wrote in a research note.

“We do not believe the company would be able to shift much iPhone volume outside of China on short notice, though actions that would push Apple production outside of China could have negative implications for the China tech ecosystem as well as for local employment,” the Goldman analysts said.

Even if China doesn’t retaliate directly, nationalist sentiment will likely hurt Apple’s sales in the country and could cause the company to miss its fiscal third-quarter forecasts, according to Lynx Equity Strategies. (…)

Keep in mind that all telcos in China are under state control…

• Xi Jinping calls for ‘new Long March’ as China digs in for long trade war Xi Jinping told cheering crowds in Jiangxi: ‘We are now embarking on a new Long March, and we must start all over again’

Chinese President Xi Jinping has called for the nation to embark on a new Long March and “start all over again”, in the most dramatic sign to date that Beijing has given up hope of reaching a trade deal with the United States in the near term. (…)

Xi’s message was delivered at a time when the country’s official media outlets have adopted increasingly nationalistic tones in relation to the trade war and broader Sino-US relations. However, media reports have stopped short of directly criticising US President Donald Trump. (…)

China has officially kept the door open to future trade talks, but no new talks have been scheduled. Technical work, such as document drafting and translation, largely ceased after the two sides failed to reach a final agreement in the 11th round of talks earlier in May, according to two sources who were briefed on the situation.

China warned last Friday that there was no point in holding more talks if the US was not “sincere” in wanting to achieve a fair outcome.

“The message is clear: China is ready to fight a protracted trade war,” said one source.

The US government’s decision last week to place Chinese technology firm Huawei and its affiliates on a trading black list has strengthened a perception in Beijing that the US is pursuing a broad strategy to thwart China’s rise, leaving little room for China to compromise on any front. (…)

Sue Trinh, a strategist with Royal Bank of Canada in Hong Kong, wrote in note on Tuesday that there has been “a significant nationalist shift in Chinese rhetoric” regarding the trade war, particularly the use of militaristic imagery terminology in official media.

An opinion piece in the state-run Global Times last Friday argued that Beijing is in no hurry to end the trade war because China is more capable of withstanding the ensuing pain than the US.

“In the best scenario, China would become more adaptable and cut our reliance on the US market for good,” the editorial said.

• American farmers are front and center in this war:

China accounted for 14% of U.S. agricultural exports in 2017, almost $20 billion worth of soybeans, hay, dairy, poultry, pork, etc.. That was nearly triple the 2007 level highlighting the significant investments American farmers have made in land and machinery to supply China. Ag products exports to China dropped to 16.3B in 2018 and are forecast to slump to $7.3B in 2019, back to their 2007 level. The data in the above charts are up to Q4’18…

U.S. Existing-Home Sales Fell in April The U.S. housing market continued to soften in April, with the spring selling season so far proving a disappointment despite falling mortgage rates and a strong economy.

Existing-home sales fell 0.4% in April from the previous month to a seasonally adjusted annual rate of 5.19 million, the National Association of Realtors said Tuesday. Compared with a year earlier, sales in April declined 4.4%, the 14th straight month of annual declines. (…)

The median sale price for an existing home in April was $267,300, up 3.6% from a year earlier. (…)

From Haver Analytics:

Sales of existing single-family homes declined 1.1% (-4.0% y/y) to 4.620 million units, the fourth decline in the last five months. Sales of condos and co-ops rebounded 5.6% (-8.1% y/y) to 570,000 units.

The number of homes on the market increased 1.7% y/y. (…)

The South is hanging in (-1.7% YoY) but everywhere else sales are pretty weak and trending lower.

  

Pending home sales for March showed similar trends:

  

House prices are below their LT average but that average includes the pre-FC abnormal levels. In reality, house prices are on the high side vs income.

If you live in the Midwest, existing home sales have collapsed from 1.3 million annualized in November 2018 to 1.17 million in April 2019.

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), rose 0.4 percent in May on a three-month moving average (3MMA) basis, the third monthly gain after several weak months. On a year-over-year (Y/Y) basis, the barometer is up 0.5 percent (3MMA).

The unadjusted measure of the CAB retreated 0.2 percent in May, with weakness centered in equity prices, and rose 0.7 percent in April. The diffusion index was steady at 65 percent in May. The CAB reading for April was revised upward by 0.27 points and that for March by 0.13 points.

“Year-earlier comparisons have turned positive in recent months, and while trade tensions, slowing economic growth overseas, and soft economic reports in the U.S. have created uncertainty that has weighed on business investment, the CAB signals gains in U.S. commercial and industrial activity through mid-2019, albeit at a moderate pace,” said Kevin Swift, chief economist at ACC. (…)

Production-related indicators in May were slightly positive. Trends in construction-related resins, pigments and related performance chemistry were mixed and suggest further slow gains in housing activity. Plastic resins used in packaging were positive, while those for consumer and institutional applications were mixed. Performance chemistry and U.S. exports were mixed. Equity prices dropped sharply this month, while product and input prices rose. Inventory and other indicators were positive. (…)

Hanging in there! A decline below the zero growth line would not be a good omen.

Banks are not upbeat:

• Banks have become less lenient on C&I loans…

…in spite of weak and weakening demand:

• Banks are generally tightening standards on consumer loans, particularly credit cards…

…in spite of weak demand:

First on that line of thought:

St. Louis Fed Chief Says Interest Rate May Be Cut to Meet Inflation Target James Bullard is first central-bank official in recent years to lay out case for lowering rate

(…) The Fed “may want to consider ways to re-center inflation and inflation expectations at the 2% target” in a climate where it has consistently failed to achieve its price-rise goal, Mr. Bullard said in remarks prepared for a presentation that he gave in Hong Kong.

One way the Fed could accomplish that would be to ease its monetary-policy stance, Mr. Bullard said.

“A downward policy-rate adjustment even with relatively good real economic performance may help maintain the credibility of the [Federal Open Market Committee’s] inflation target going forward,” Mr. Bullard said. “A policy rate move of this sort may become a more attractive option if inflation data continue to disappoint.” (…)

Other Fed rate-rise skeptics, like Minneapolis Fed leader Neel Kashkari, have refrained from saying a rate cut was in the cards. Most central bankers see steady rates this year, and some who had thought an increase might happen have backed away. Meanwhile, financial markets are eyeing a rate cut by year’s end. (…)

EUROPE: NOT A UNITED FRONT

Source: @acemaxx, @FT; Read full article