What retailers are telling us

good morning. The House of Representatives narrowly passed Donald Trump’s “big, beautiful bill” yesterday, leaving the Senate as the final hurdle. As it stands, the bill will already be added to the US budget deficit. The bond market was hardly moving on with the news. It was probably on sale at a wealth of financial prices.

Retail Results

How do US consumers hold up? And what is the impact of increased tariffs on consumer prices?

These are two of the biggest questions facing the US market and are interrelated. Luckily, over the past week or so, we have received some insights on both. A set of key US retailers report results for “big box” players Walmart, Target, BJ Wholesale, Home Depot, Lowes, and more. So does Specialists TJX, Roth Store, Urban Outfitters, Ralph Lauren and Williams Sonoma.

There was a clear inconsistency between the two sets of indicators regarding consumer health. “Soft” data from sentiment surveys and others may seem awful, but “difficult” data on employment and consumer spending is solid. Retailer results are very clearly rebutting bad soft data and verifying good hard data. The only chains that imposed sales growth for the same negative store were Lowe (struggling with the frozen housing market) and Target (its business models and strategies have been shaking for years).

As companies have over a few quarters, customers say they are “focused on value” and sometimes hesitate to buy big tickets, but it’s hard to spot any signs of a recent slowdown in retailer outcomes. Walmart’s US business head said that consumers “continue to be consistent and we continue to see our customers prioritize delivery value and speed. We are growing across all our quarterly revenue cohorts.”

And while all companies nodded to higher uncertainty, almost all of them maintained their annual sales and profit targets. A notable exception was Ross Store, a discount clothing chain that sources more than half of Chinese products. Due to the “various nature of the announcement of tariffs,” the previous target was withdrawn.

This brings us to the price issue where the photos are not very clear. Part of this has to do with the sequence of reports. Walmart reported on May 15th, reporting with spectacular plainly that “even the levels of decline announced this week cannot absorb all the pressure given the magnitude of tariffs, given the reality of the narrow margins of retail.” One analyst asked why Walmart didn’t see tariffs as an opportunity to lower prices and take market share from its weaker rivals. Chief Executive Doug MacMillon replied that the company would do so.

. . . Look at what our customers are saying to us, the reaction we have received from them, and the pressure they are feeling. So the bottom row is what you can do if you need to invest more (at a lower price). That being said, I really want to make profits faster than sales. Just as we’ve been working on this for a long time. I think we deserve it. You (investrs) deserve it. And you can navigate this to some extent so that you can balance all the interests between customers, shareholders and everyone else, keep prices low enough, support people, and make profits faster than they sell.

For those who haven’t edited it is a great statement about how corporate capitalism works, but the US President disagrees. Donald Trump wrote the truth socially that Walmart and their Chinese suppliers should “eat tariffs.”

The retailer reported after Walmart seemed to notice the president’s complaints and described pricing strategies in worship or ambiguous terms, referring to “portfolio pricing” (prices seen as a whole, rising against decline). Home Depot executives hedged these issues:

Usually, we intend to maintain pricing across our portfolio. . . There is no wider customer price rise in the future. . . It’s a great opportunity for us to share and a great opportunity for our suppliers to share.

“Generally”; “Broadbase”; Interpret these qualifiers as you like. Several other companies said they are committed to the competition for the rest of the price. Most people said there were “many levers” to pull to offset the tariffs, of which only one priced. and so on.

Reading between lines, the industry’s lines regarding price increases are: Some prices are certainly rising due to tariffs. You can see customer response. And we take it from there.

Long bond yields

The long end is rising. And not only in the US: 30-year bond yields are rising in developed countries:

Over the past few weeks, the Republican budget has been focusing on the US budget, which has led to aggravating the US financial situation and concerns about rebalancing foreign investors away from the US. The price of credit default swaps for national debt has increased.

That’s not the case in Japan, Germany or the UK, but global yields still follow the US yields. “When interest rate volatility rises in certain parts of the US curve, that term moves through other countries very quickly. Say everything you want about the end of US exceptionalism, US finances are still the basis of the global rate system. If US long bonds are surged in prices and offer more attractive yields, the rest of the world will feel gravity.

In other words, Japan is an exception. There, long bond movements may not only respond to it, but also contribute to a decline in financial prices. Japan has experienced its own financial struggle over the past few weeks. James Malcolm of UBS explains:

The situation in Japan is specifically Japanese. There are mainly a huge amount of Japanese government bonds issued annually and require refinance. (In the previous financial regime), BOJ was a huge buyer of net new issuances. The market has become accustomed to absorbing supply almost. . . (The end of Boj’s quantitative easing), we have now realized that the domestic market has little capacity to take over BOJ.

With the aging population and new defence commitment, the Japanese government still needs to issue a lot of debt, but at the same time the BOJ wants to scale back its balance sheet. Other natural JGB buyers, especially life insurance companies and pension funds, are also facing economic pressure. We saw all of this at work at a disastrous JGB auction earlier this week.

Of course, as we learned from the carry trade panic last summer, Japan’s fees and currency are tied to the rest of the world. Albert Edwards of Société Générale writes it:

The Japanese bond market is not isolated. It is the world’s keystone for keeping harvests down. For years, Japanese institutions supported the global bond market through yen-funded carry trade and large foreign bond purchases, particularly the US Treasury Department.

Carry trade borrows Japanese lower assets to buy higher yield global assets – it is widely believed that it contributed to higher global asset prices, including financial prices. As the JGB rises rapidly, the rate gap between the rest of the world will narrow, reducing the appeal of carry trade, reducing our global surrender.

This is all a bit of a guess. The scale and impact of carry trade is difficult to measure. However, the mutual nature of global bond movements is interesting. The United States is contributing to the movement of Japan’s bonds, and Japan may be doing the same thing to the United States. And the patterns look self-reinforced.

(writer)

One good read

Weapon procurement.

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