Sales are up, should you start shopping for retail stocks?

Yesterday the ABS reported Australian retail sales rose 0.9% in September. This was well ahead of economists' forecasts for a meagre 0.3% growth. Ordinarily one would think this is a positive for stocks, after all, consumer spending typically accounts for around two-thirds of GDP. Strong economy, strong earnings, strong stock market is typically how it goes.

This time it's a little different. "Strong economy, strong inflation, higher interest rates" is likely to be the preferred narrative for investors as we approach the RBA's next meeting on Cup Day, November 7. Combine yesterday's big spending beat with last week's worse than expected inflation data, along with some rather hawkish comments from new RBA chief Michelle Bullock earlier in the month, and most economists are now tipping a 0.25% increase in the official cash rate to 4.35%.

Source: asx.com.au

The futures market appears a little more sanguine, however, with the 30-day interbank cash rate target implying the probability of a 0.25% increase to 4.35% has increased from 47% to 52% following the retail sales beat. There are two other sharp jumps on the above chart, one after the release of this month's RBA Meeting Minutes on 17 October (and Governor Bullock's hawkish comments), and one after the release of the September quarter inflation data on 25 October. It will be interesting to monitor the evolving trend here as we converge on the upcoming November meeting. For now, the trend is not your friend here.

Worse still, looking further out, this morning Citi analysts went as far as calling for a "follow-up" 0.25% increase in December. What a bunch of Grinches! Clearly, the only thing which is certain for the local stock market at the moment is uncertainty. The economy appears to be doing a little better, but the RBA may throw one, or if you believe Citi, two major spanners in the works before Christmas.

Market Reaction

The S&P ASX 200 fell 10 points immediately after the release of yesterday's retail sales data. An understandable response based upon what it implies for local interest rates. But, it then rallied over 30 points over the next few hours before sliding back to close around where it started before the data was released. I'm not going to draw any major conclusions from this snippet of price action, there's too much other stuff going on in the world to single out one piece of data as a sole market mover - but I don't expect investors are going to continue to behave as if good news is bad news for very long. At some stage, once we have a firmer grip on where the top in interest rates is, good news will once again be good news - and this should be good for stocks. If spending keeps kicking along, more specifically, it should be good for retail stocks.

Discretionary vs Staples for your shopping list?

The ABS noted growth in discretionary spending has outpaced essential spending growth by double over the last three months (0.8% vs 0.4% per month). As they put it, "households are choosing to spend on non-essential items despite cost of living concerns".

Both the Consumer Discretionary and Consumer Staples sectors have been hit hard in the recent market pullback. At the time of writing, the ASX 200 Consumer Discretionary Sector Index (ASX: XDJ) is down 8.9% from its 2023 peak and the ASX 200 Consumer Staples Sector Index (ASX: XSJ) is down 14.6%. Those who chose to favour a defensive portfolio of staples companies over more interest rate sensitive discretionary names have gotten it very wrong.

ASX Consumer Discretionary Sector Index chart (ASX: XDJ)

One key observation in the wake of the market's reaction to the retail sales data yesterday was the outperformance of consumer discretionary stocks versus consumer staples stocks. The XDJ closed well off its lows, while the XSJ closed on its lows. Both sectors are up nicely in today's more modest rally in the benchmark S&P ASX 200, however.

ASX Consumer Staples Sector Index chart (ASX: XSJ)

Neither chart compels me to want to get involved in retail stocks just yet. The XDJ is in a short term downtrend, a neutral long term trend, is demonstrating lower peaks and lower troughs (price action), as well as predominantly black candles. The XSJ is far worse, showing a well-established short-and-long-term downtrend, along with similarly terrible price action and candles. It is clear the supply-side remains in control of prices and demand is yet to make a meaningful foray back into either sector.

JB Hi-Fi (ASX: JBH)

Should the good news on retail spending hold up, and if the market begins to look past the spectre of another rate hike, there are a few stocks which look promising from a technical standpoint. JB Hi-Fi (ASX: JBH) deserves an honourable mention because it has held up so well during the recent market downturn. Trends are flat, granted, but they're not down, and the recent cluster of white candles tells me there's some buying coming back in. It's a stalwart of the Consumer Discretionary sector and deserves a closer look if the sector starts to turn.

National Tyre & Wheel (ASX: NTD)

The others are relative minnows, but appear to be well ahead of the curve in terms of a turnaround. Keep an eye on Adore Beauty (ASX: ABY) which appears to have regained its short term uptrend and is challenging its well-established long term downtrend. More advanced in transitioning back to long term uptrends are National Tyre & Wheel (ASX: NTD) and Step One Clothing (ASX: STP). Both are showing strong recent price action (i.e., higher peaks and higher troughs) along with clusters of white candles indicating the demand-side is active in the market.