Very interesting yesterday were the comments from Ian Siegel, the CEO of ZipRecruiter, on CNBC in response to questions from Kelly Evans on the labor market. “After an extended record run in the labor market…in the back half of June, for the first time in more than a year, we saw a slowdown in the labor market, particularly amongst small and mid-sized businesses in a quarter in which you add 500k new jobs and you bring unemployment to 3.5%, it’s not surprising to see the labor market take a breadth, take a pause but that pattern has continued and it looks like it is the beginning of a slowdown in the overall labor market.” He did say though that “employers still have a healthy appetite for talent however that appetite is being pulled back as they have less success in hiring and they are reassessing the way they’re operating their businesses right now.” He still referred to the labor market as “frothy” and there is “still a high level of activity” but it seems a bit less so.
Explaining the gross margin degradation in its results which fell to 21.5% in Q2 2022 vs 30.4% in Q2 2021, Target today said it was “driven primarily by inventory impairments and actions taken to address lower than expected sales in discretionary categories, as well as higher merchandise, inventory shrink, and freight costs. Additionally, gross margin rate was pressured by increased compensation and headcount in our distribution centers, the costs of managing excess inventory, and higher per unit last mile shipping costs.”
Here were some noteworthy comments from the Walmart call yesterday:
“We’re pleased to see more families from a variety of income levels choose us as they look for value…In Walmart US business, we have seen mid to higher income customers come to Walmart looking for value, as you would expect, food and consumables, in particular, are places where they’re looking to save some money.”
“As we move through Q2, food inflation continued to tick up, and we continue to see a heavier mix of sales in food and consumables in many of our markets, and that put pressure on margins overall.”
“We’ve made good progress to reduce inventory levels where we focused and taken markdowns…We’ve cleared most summer seasonal inventory, but we are still focused on reducing exposure to other areas such as electronics, home and sporting goods. We’ve also canceled billions of dollars in orders to help align inventory levels with expected demand. We estimate that only about 15% of our total inventory growth in Q2 is still above optimal levels.”
“We do see a few categories in the store where prices are starting to come down, but there are other categories where they’re still rising.”
Some from Home Depot:
“Turning to our comp performance during the 2nd quarter, all of our merchandizing departments posted positive comps, building materials, plumbing millwork, paint, and hardware were all above the company average. Electrical decor and storage, kitchen and bath, outdoor garden, tools, appliances, indoor garden, lumber and flooring were positive, but below the company average.”
“We’re operating in a broad based inflationary environment not seen in four decades, while managing through constrained global supply chain conditions, all against a backdrop of monetary policy shifts intended to moderate demand. We also see engaged and resilient homeowners who have strong balance sheets, consumer spending more time in their homes, and continued structural support for home improvement project demand.”
On a question on whether they are seeing the impact of a slowing housing market, “So we all appreciate the headlines and follow those very closely, but we have not seen anything in our business yet from macro housing.”
“And as people, including Pros, came back from vacations, we saw it in acceleration in the business midway through July, and that has continued into August. I think people are back home and home from the beach, the mountains, etc., and back engaging in home improvement projects.”
“the strongest and most correlated for our sales is home price appreciation. Now that’s gone up 30, 40% in the last couple of years, which we believe translates to, high $8 trillion, $9 trillion of increased wealth with what is our core customer base.”
“So part of our inventory overage is obviously due to that work in terms of being there for our customers. We do have some carryover inventory from the spring season, but it is really low risk inventory that we’re managing through and ensuring that we’re ready for next season. But overall, we feel very good about our in-stock position. We’re managing the inflationary environment in inventory and we’ll be there for our customers in terms of in-stock.”
The average 30 yr mortgage rate was little changed w/o/w at 5.45% vs 5.47% last week. Purchase applications fell .8% w/o/w and by 18.4% y/o/y. Refi’s declined by 5.4% w/o/w and down by 82% y/o/y. Nothing more needed to add here that we don’t already know.
In Asia, we saw better than expected trade data out of Japan and Singapore. Japan’s exports are certainly getting helped by the weak yen, as well as for auto’s and chip equipment and their imports, up 47% y/o/y, are juiced by higher energy prices. Singapore’s exports were helped by a rise in electronic products. We’re long stocks in both countries.
The Reserve Bank of New Zealand raised interest rates by 50 bps to 3% as expected. The RBNZ said “The committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment. Core consumer price inflation remains too high and labor resources remain scarce.” They seem to want to get to a 4% rate before stopping.
Inflation in the UK was hotter than expected in July as CPI rose 10.1% y/o/y and the core rate was higher by 6.2%, both 3 tenths more than anticipated. The retail price index jumped by 12.3% y/o/y. There was some relief with regards to producer prices with input prices rising just .1% m/o/m but only after spiking by 1.8% in June. Output prices were up another sharp 1.6% m/o/m.
The BoE expects CPI to get to 13% in coming months as price caps on electricity get readjusted. The ONS said higher food prices were the main contributor to the double digit headline rise in July. This data comes a day after we saw weekly earnings ex bonuses in June rise by 4.7% y/o/y. In response to the inflation print, the 10 yr breakeven is rising by 14 bps to 4.16%, the highest since early June. Gilt yields are jumping too, with the 10 yr higher by 16 bps after being up by 11 bps yesterday. Bonds in Europe are down across the board too, with yields up. In turn, US yields are higher too. The BoE has their bank rate at just 1.75%.
UK CPI
UK 10 yr Inflation Breakeven