Broad strength was led by Amazon\u2019s Prime Day sales event, which propelled ecommerce sales up 1.9%. Other contributors to growing sales including the following categories:<\/p>\n\n\n\n
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- Sporting goods sales, up 1.5%<\/li>\n\n\n\n
- Restaurant sales, up 1.4%<\/li>\n\n\n\n
- Apparel sales, up 1%<\/li>\n<\/ul>\n\n\n\n
Food markets, building materials stores, personal care retailers, general merchandise shops and gasoline stations contributed to lesser degrees.<\/p>\n\n\n\n
On the other hand, the following categories detracted from results:<\/p>\n\n\n\n
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- Furniture dealers, with sales declining 1.8%<\/li>\n\n\n\n
- Electronics and appliances suppliers, with sales dropping 1.3%<\/li>\n\n\n\n
- Automobile dealerships, with sales declining 0.3%<\/li>\n\n\n\n
- Miscellaneous, with sales declining 0.3%<\/li>\n<\/ul>\n\n\n\n
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<\/figure>\n\n\n\nBank Fears Extend Beyond Regional Financial Institutions<\/strong><\/h2>\n\n\n\n
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Fitch pointed to regulatory gaps, uncertainty about interest rates, commercial real estate valuations, borrower delinquency rates and the U.S.\u2019s sovereign credit rating.<\/strong><\/p>\n<\/blockquote>\n\n\n\n
As consumers search for more closet space after splurging in July, Fitch Ratings has announced that it is considering another downgrade of the overall banking industry, a move that could lead to credit rating downgrades of some of the country\u2019s largest banks such as JP Morgan Chase. In June, Fitch cited a challenging operating environment for banks and cut the industry\u2019s score from AA to AA-. In doing so, it pointed to regulatory gaps, uncertainty about interest rates, commercial real estate valuations, borrower delinquency rates and the U.S.\u2019s sovereign credit rating. Downgrading the industry to A+ would require Fitch to downgrade various banks because bank ratings can\u2019t be higher than the industry\u2019s rating. Such a move would then require Fitch to evaluate other banks and potentially lower credit ratings for numerous financial institutions.<\/p>\n\n\n\n
China Malaise Prompts Rate Cuts<\/strong><\/h2>\n\n\n\n
In China, consumer demand has been anemic, compelling the nation\u2019s central bank to cut interest rates by 10-15 basis points (bps) across lending durations. Additionally, the People\u2019s Bank of China also injected 204 billion yuan into the economy to support lending and liquidity conditions. The nation has been struggling with a manufacturing recession driven by weak orders from other countries, high oil prices, a real estate slump and elevated youth unemployment. Furthermore, a credit crunch and trade tensions with the West continue to hurt confidence.<\/p>\n\n\n\n
Inflation\u2019s Far Reach<\/strong><\/h2>\n\n\n\n
Price increases continue to threaten economies around the globe with July\u2019s Canadian headline inflation of 0.6% m\/m and 3.3% y\/y significantly exceeding projections for just 0.3% and 3%, respectively. In similar fashion, core inflation rose 0.5% m\/m and 3.2%, loftier than estimates of 0.4% and 2.8%. Price pressures remained strong in the U.S. as well, with July import and export prices up 0.4% and 0.7%, hotter than the consensus\u2019s expectations of 0.2% for both categories. Most of the upside pressure was driven by energy prices in Canada and the U.S.<\/p>\n\n\n\n
Corporate Results Depict Weak Retail Spending<\/strong><\/h2>\n\n\n\n
While this morning\u2019s retail sales data is encouraging, executives at Home Depot and Foxconn just provided downbeat views of consumer spending. Home Depot Chief Financial Officer Richard McPhail this morning said second-quarter sales declined 2% y\/y because many consumers already made big ticket purchases and completed large home improvement projects during the Covid-19 pandemic. Consumers who have yet to do so are holding off on large purchases and making home improvements due to higher financing costs. The trend of consumers splurging on services rather than goods is also continuing and the company expects same-store sales to drop between 2% and 5% this year relative to 2022. Home Depot\u2019s earnings per share (EPS) of $4.65 declined from $5.05 in the year-ago quarter but exceeded the expected EPS of $4.45. Foxconn, which is a contract electronics maker and supplier to Apple, yesterday said it expects overall third-quarter sales to decline with slumping sales of consumer smartphones while global monetary policy tightening, inflation and geopolitical risks create headwinds for consumers and businesses. Foxconn\u2019s strong results in manufacturing artificial intelligence GPU modules contributed to the company beating earnings expectations.<\/p>\n\n\n\n
Investors Embrace Caution<\/strong><\/h2>\n\n\n\n
Markets are reacting cautiously to today\u2019s strong retail sales, with investors concerned that the results will pressure the Federal Reserve to maintain its restrictive policy. All major U.S. equity indices are down around 1%, will all sectors in the red. Meanwhile, regional banks are leading the way lower on the back of the Fitch warning, with the sector\u2019s ETF (KRE) down 2.2%. Fitch\u2019s warnings didn\u2019t spare the big banks either, pushing the financial sector ETF (XLF) down 1.5%. Investors are scooping up Treasuries marginally, however, with short-medium term bond yields generally lower by a few basis points across the curve. Prospects for further tightening in the U.K. and the Euro Area are weighing on the dollar, with odds slightly favoring no more rate hikes from the Fed. Probable rate hikes from the Bank of England and the European Central Bank, however, are pushing up borrowing costs and the two respective currencies, while the Dollar Index has declined 24 bps to 102.92. Energy markets are weaker this morning in response to weak data from China, the world\u2019s largest oil importer, which has sparked concerns about demand for the commodity even as supply conditions remain buoyant. WTI crude oil is down 2.1% to $80.76 per barrel.<\/p>\n\n\n\n
The U.S. Consumer Just Won\u2019t Quit<\/strong><\/h2>\n\n\n\n
U.S. shoppers continue to defy expectations with strong spending supported by a tight labor market that has resulted in consumer sentiment gains while wages increase faster than inflation. Consumer optimism is also being supported by a strong equity market, with the S&P 500 Index generating an 18.11% year-to-date return. Meanwhile, economic headwinds are persisting, such as inflation increasing the cost of living and higher interest rates making financing more expensive. In the coming months, consumer optimism and the ability of consumers to support economic growth will be tested as the long and variable lags of monetary policy appear. Many consumers will also face the burden of having to resume tuition debt payments. For investors, the coming months will help illustrate if consumer spending is sustainable and likely to help the country avoid a recession as the Fed continues to battle inflation.<\/p>\n\n\n\n
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