Market 11/21: FOMC Minutes and pessimistic outlook for the retail sector

Summary of FOMC Minutes October 2023

FOMC members unanimously agree to keep the policy rate high for some time (contrary to the market's desire for early rate cuts.
Members agree to make interest rate decisions "in a careful manner"
Affirm the goal of only making rate cut decisions if inflation decreases.
=> The tone of this FOMC Minutes is quite hawkish compared to market expectations after positive CPI data and negative signals from the labor market.
- The only message from the FOMC Minutes is "wait and observe economic data"!

Existing home sales hit the lowest level since 2010

Existing home sales (existing homes) down -4.1% M/M (20th declining month in the past 23 months), down more sharply than the -2.2% M/M decline in September.

This figure is equivalent to a -14.6% Y/Y decline

Seasonally adjusted existing home sales fell to just 3.79 million - the lowest since the homebuyer tax credit program expired in August 2010.

The vacancy rate fell to a record low in August and only rose slightly in September.

Although mortgage rates have now started to decline, it is still a long way for existing home sales to recover to previous levels.

Regarding prices: new home prices have peaked and are now declining as builders cut prices to gain market share.
- Meanwhile, existing home prices remain around peak levels as current owners face little pressure to sell or buyers are not forced to bid up prices

Number of real estate investors in Q3/2023 down -29.7% Y/Y - the lowest in any Q3 since 2016.
Total homes bought and sold down -22.2% Y/Y, the lowest in Q3 since 2012.

NAHB housing sentiment index heading towards post-pandemic lows.

Most loans are locked at low rates → people don't want to take out new loans to buy homes at current high rates.

On the other hand, household financial capacity is also facing issues.

According to the New York Fed survey, only 65.8% of surveyed households can afford an unexpected $2000 expense — the lowest since 2013.

Retail stocks slide as earnings miss expectations

Retail sector stocks plunge as companies report earnings below estimates and cut Q4 outlooks.

Abercrombie & Fitch
Kohl’s
Lowe’s
Best Buy
=> Most of the retail sector has an unoptimistic view, signaling consumer spending will decline in the coming period!
(Details below)

FYI: Hedge funds are selling consumer staples stocks at the fastest pace since Covid.

Q3 earnings update: Best Buy, Lowe’s, Kohl’s, Zoom

Best buy

EPS: 1.29 USD, higher than expected 1.18 USD
Revenue: 9.76B USD, below expected 9.9B USD, down 7.8% Y/Y
Best Buy lowers full-year revenue outlook, forecasts sales decline in key holiday quarter as high inflation and rates weaken spending demand.

Lowe’s

Net revenue: 20.47 billion USD, down -13% Y/Y, below estimate of 20.91 billion USD
Gross profit 6.89 billion USD, down -12% Y/Y, below estimate of 6.99 billion USD
Gross margin 33.7%, up from 33.3% YoY
Total branches 1,746, -11% YoY, estimate 1,739
Retail space 194.90 million sq ft, -6.3% YoY, estimate 194.46 million

Lowe’s cuts full-year earnings guidance, citing impact from sharp drop in consumer spending on big-ticket items.

Kohl’s

EPS: 0.53 USD (expected 0.36 USD)
Revenue: 3.84B USD (expected 3.97B USD)
Kohl’s department store chain reports quarterly revenue down -5.5% YoY, as customers spend less amid prolonged high inflation

Zoom

B2B (enterprise) customers: +5% YoY to 220,000
Customers with > $100K TTM revenue: +14% YoY to 3,731
Revenue +3% YoY to 1,137M USD (20M above estimate)
Non-GAAP EPS: 1.29 USD
2024 revenue guidance ~4,510M USD.

US-China trade relations ease: Broadcom-VMware $69B M&A deal succeeds

US chipmaker Broadcom to complete acquisition of cloud software firm VMware on Wednesday, after China approves $69B deal.

Beijing approved the deal with some “restrictive conditions,” a sign that China is working to ease trade tensions with the US amid slowing domestic economic growth.

Other news

Binance CEO and founder Changpeng Zhao (CZ) steps down immediately after pleading guilty to money laundering.
Binance agrees to pay fine 4.3B USD (and continues to operate).
Texas AG Ken Paxton accuses Pfizer of quality control failures in ADHD drugs for children