Morning Wrap: Inflation chips away at US retailer earnings, Wall Street plunges, ASX set to fall

What a trainwreck of an overnight session. The Dow Jones and S&P 500 booked their worst declines in two years, cost inflation is eating away at US retailer profits, commodity prices dipped as risk appetite fell off a cliff and US Treasury Secretary Janet Yellen warns of greater stagnation risks. 

Let’s dive in.

Stocks

• Wall St erased this week’s hard earned gains after major US retailers reported weaker-than-expected profits

  • Investors and economists pay close attention to Walmart earnings for clues about how the American consumer is holding up

• The S&P 500 is down -17.7% in the first 95 trading days of 2022, the 2nd worst start to the year in history

  • The worst was a -32.9% drawdown in 1932

  • In the 1932 selloff, from day 96 to year-end, the S&P 500 was up 27%. (Still finished the year -14.8%)

• All 11 US sectors were red

• All sectors fell at least -2.6% except utilities 

• Discretionary, staples and tech fell the most

• 80% of US stocks declined

• 74% of US stocks trade below their 200-day moving average (70% on Wednesday, 76% a week ago) 

• Target (-24.9%) earnings were well-below expectations as the retailer was slammed by freight costs, higher markdowns and lower-than-expected sales

• Walmart (-6.8%) extended losses after falling -11.4% on Wednesday. Higher fuel prices, labour costs and aggressive inventory levels weighed on profits

• Lowe’s (-5.3%) missed Wall St revenue expectations as cooler weather hurt demand for outdoor do-it-yourself projects. The home improvement retailer managed to meet profit forecasts and reaffirmed its full-year outlook

  • “I’m not saying the macro environment does not matter. I’m saying that for home improvement we are not seeing any material impact,” said CEO Marvin Ellison

• Cisco (-4.4%, after hours: -12.1%) missed revenue expectations and issued an unexpected decline in its earnings outlook. Cisco said it expects fourth quarter revenue to fall between -1% to -5.5% vs. estimates of a 5.7% gain

Economy

• US new home construction fell -0.2% in April

  • Marks a consecutive three-month decline

  • Housing permits fell -3.2%

• US housing market beginning to show cracks. In May:

  • MBA (Mortgage Bankers Association) mortgage applications -11%

  • Purchase index -11.9% 

  • Refinancing index -9.5%

  • 30-year mortgage rate at 5.49%  

• UK inflation rose 9% year-on-year in April

  • Highest reading since Margaret Thatcher was Prime Minister 40 years ago

  • Economists had expected a 9.1% gain

  • The increase is more than double the pace of wage growth, likely to squeeze consumers in the near-term

• Canada inflation hit 6.8% in April

  • Highest reading since 1991

Commodities

• Iron ore prices fell sharply, breaking below US$130/t

• Oil prices dipped as persistent pricing pressures could lead to weaker demand in the short-to-medium term

• Gold prices stood tall as investors fled to safe haven assets

We all went to bed feeling bullish about a 4-day win streak for the ASX.

Now, we wake up to absolute carnage.

#1 Retailers

It will be interesting to see whether or not weak earnings from Target, Walmart and Lowe's will have an impact on local retailers.

Wesfarmers (ASX: WES) arguably has the most similarities with the three US retailers above, given its ownership of Target/Kmart, Officeworks and Bunnings.

Its worth noting that a lot of ASX retail stocks have already faced significant year-to-date declines, including:

• Eagers Automotive (ASX: APE) -17.5%

• Baby Bunting (ASX: BBN) -24.2%

• Premier Investments (ASX: PMV) -24.2%

• Accent Group (ASX: AX1) -42.5%

By comparison, Target was down just -7% before the -25% crash overnight.

#2 Uranium

The Global X Uranium ETF dipped -4.6% overnight.

Uranium prices are back to last September levels of US$48/lb, a sharp U-turn from April 15 highs of almost US$65/lb.

Sprott has also been rather quiet in the past few weeks with its uranium purchases.

Despite the strong medium-to-long term outlook for uranium and nuclear adoption, its interesting to see that its near-term performance hinges on one buyer taking supply off the market and pushing up prices.

Source: TradingEconomics

#3 Tech

Its not a real selloff if tech isn't getting smashed.

The Nasdaq headlined losses, down a grueling -4.7%. Mega cap names fell heavily, including:

• Amazon -7.2%

• Tesla -6.8%

• Apple -5.6%

• Meta -5.1%

• Microsoft -4.8%

The S&P/ASX 200 Info Tech Index managed to rally 1.9% on Wednesday.

I wonder what's in store for Thursday.

#4 Energy

Oil struggled to withstanding the risk-off environment, down almost -4% overnight to US$109 a barrel.

Surging inflation in the UK and persistent pricing pressures is leading to a less optimistic outlook for oil demand.

"China’s zero COVID policy will remain intact and that is why the crude demand outlook will get downgraded if more outbreaks occur. Beijing saw 69 new cases and Tianjin’s Binhai area saw two buildings put into lockdown," said Oanda senior market analyst, Ed Moya.

"The EIA crude oil inventory showed a surprise draw and a small recovery of US production. The production increase is not matching the steady rise in rig counts, which suggests this market will remain tight."

#5 Other

Other honorable ETF mentions include:

• Steel -3.7%

• Jets -3.4%

• Copper -3.2%

• Rare Earth/Strategic Metals -2.7%

ASX corporate actions occurring today:

• Ex-dividend: PDL, USQ, VUK, WBC

• Dividends paid: None

• Listing: None

• Issued shares: 1AG, ADA, ATC, AVR, CYL, EN1, ENX, EYE, FBU, FXG, LIT, LNU, LVT, MAF, MFG, MLS, MXO, NAB, NAC, ODA, PPE, QVE, RF1, SGH, SIQ, TFL, TSL, VTG, WR1

Other things of interest (AEST):

• Australia Unemployment Rate (April) at 11:30 am

• US Philadelphia Fed Manufacturing Index (May) at 10:30 pm

• US Initial Jobless Claims (week ending May 14) at 10:30 pm