After listening to the Home Depot conference, their main concerns that impacted comps were weather, lower lumber prices and for the future, the possibility of higher tariffs. They didn’t seem concerned at all with the cap on SALT deductions in those states most affected. This is what they said in the call, “There’s been a lot of conversation about what’s happening in home prices in LA. Our comp in LA was considerably ahead of our company for the first quarter. Let’s take a market like New Jersey where people are very concerned about what would happen to sales, given it’s a high SALT state and we see that New Jersey is actually outperforming the company average too. So trust me, we’re spending a lot of attention looking at performance by market, but we just can’t see anything at this point in a negative way.” So, at least right now they see no impact but I’ll stick to my belief that if we keep seeing 10 to up to 30% home price declines for upper end homes in these key states, that will filter into lower prices down market and home improvement sales will get negatively impacted.
Lowe’s is getting hit hard this morning but on the surface from the press release it seems more of a cost issue than top line. I’ll report back on what they say about sales in high taxed states on the conference call.
We saw the 12% drop in Kohl’s stock yesterday and while they have secular challenges by being a department store, 27% of their store base according to their 10K is in NY, NJ, CT, CA, IL, and MA which combined make up a big chunk of GDP, about a third. Nordstrom stock is down about 10% after earnings last night and 40% of their full price store base is in those states with California alone making up 25% according to their 10K. We certainly know the higher end nature of the Nordstrom clientele.
A rather sharp 7 bps w/o/w decline in mortgage rates to 4.33%, the lowest since January 2018 did nothing to help the purchase component of weekly mortgage applications. They fell 2% w/o/w and are now down 4 of the past 5 weeks to the lowest level since mid March in this key selling season. The positive though is that they are still up almost 7% y/o/y. Refi’s were helped the most by the fall in rates as they jumped 8.3% w/o/w and are up 31% y/o/y. We see new home sales tomorrow for April which will be a more timely figure than yesterday’s existing home sales number which we know missed expectations.
In response to the macro China news and the very choppy stock market we’re witnessing, Investors Intelligence said Bulls fell to 49.5 from 51.4 last week and is now a few weeks removed from an over 55 print which was getting up there. Again though these Bulls went to the Correction side (they are still bullish and want to buy the dip) as Bears fell to a 14 month low to just 17.2 from 17.5 last week. Bottom line, while from a pure contrarian standpoint it’s good to see a decline in Bulls, it is somewhat neutered by the disappearance of the Bears.
After reporting yesterday the disappointing month to date export figure from South Korea for May, we keep getting more April numbers on trade. Last night Japan said its April exports fell 2.4% y/o/y, a bit more than the expected drop of 1.6% and this is now the 5th month in a row of y/o/y declines. Exports to China fell 6.3% y/o/y. With respect to semi’s which I’ve been talked about the disconnect between the stocks and the hard data, which is now reconciling, shipments of semi equipment plunged by 41%. The positive within the trade data was the 6.4% rise in imports which was better than expected. The other positive data from Japan was that April machinery orders rose 3.8% m/o/m, better than the forecast of flat. This though is a very volatile number month to month but we’ll take it. With the mixed economic messages, the Nikkei closed flat on the day while the 10 yr JGB yield fell 1 bp to an even more negative .056%.
We saw inflation stats out of the UK where consumer prices continue to run well above the level of UK interest rates. Headline CPI rose 2.1% y/o/y in April, up from 1.9% in March but that was one tenth less than expected. The core rate was higher 1.8%, the same increase as March but also one tenth below the estimate. The retail price index however jumped 3% y/o/y from 2.4% in March and that was two tenths more than expected and which is the quickest pace of growth since November. On the wholesale side, input prices continue to outpace output charges and thus the margin squeeze continues.
Bottom line, the weakness in the pound for now 3 years has had a notable impact on inflation in the aggregate, aka much higher. The BoE though has been stuck doing nothing about it, and in fact exacerbated the decline in the pound with their increased QE and immediate rate hike after the vote, because they’ve been completely paralyzed by Brexit. Gilt yields are down today but I don’t know if it’s because of the CPI miss or continued disarray with Brexit where the pound is down again, the 11th day in the past 13.