Coming Week: Retail in the Spotlight
With oil prices continuing to skyrocket and consumer confidence at a 28-year low, the stock market continues to plod toward the promise of an economic rebound in the second half of the year.
Treasury Secretary Hank Paulson lent support to last week's rally on Friday by predicting a second-half turnaround even while his boss, President Bush, was in Saudi Arabia begging King Abdullah to raise oil production to ease crude prices, which were making new intraday highs above $127 a barrel.
"The fiscal stimulus will provide support to the economy as we weather the housing correction, capital markets turmoil and higher energy and food prices," Paulson said in a speech.
The market seems to have adopted Paulson's view. The
Dow Jones Industrial Average
gained 1.9% last week, while the
S&P 500
added 2.7% and the
Nasdaq Composite
was up 3.4%. Federal funds futures are pricing in no more rate cuts from the central bank in 2008, as well as a possible rate hike before year-end when
Federal Reserve
Chairman Ben Bernanke shifts his focus back to price stability as economic growth revives.
That forecast will face a test this week as a slew of major retailers offer up first-quarter earnings results and offer guidance for the future, providing a fresh snapshot of the most vulnerable sector of the economy besides the beleaguered financial industry: consumer discretionary.
"Retailers are getting whacked now because of the financial strains that are weighing on consumers," says Tim Speiss, head of the wealth-management arm of Eisner LLP in New York.
Reuters/University of Michigan Surveys of Consumers reported Friday that its preliminary index of confidence fell to 59.5 in May from 62.6 in April. That marked the lowest reading for the index since June 1980 -- the depths of the worst economic slowdown in the U.S. since the Great Depression.
The report comes as Americans continue to reel from price declines in the U.S. housing market, a spike in mortgage foreclosures and a credit crisis on Wall Street that brought the fifth-largest investment bank,
Bear Stearns
( BSC), to the brink of bankruptcy in mid-March.
Meanwhile, soaring food and fuel costs are taking a heavy toll on consumers, and a persistent bull run in commodities markets has raised the specter of global inflation. The inflation threat, along with hopes for an economic turnaround, have led investors to expect a standstill from the
Fed
, which has already slashed its key short-term interest rate by 325 basis points since last summer.
Even so, the government's core consumer price index, which excludes food and energy prices, remains under control. Last Wednesday, the Labor Department reported a 0.1% uptick in core CPI in April -- half the pace that economists had expected. Headline inflation slowed to 0.2% for the month from 0.3%. The report boosted Bernanke's view that inflationary forces will moderate.
This Wednesday, the government is expected to report that its producer price index, which measures wholesale prices, rose 0.3% in April, which would mark a decline from the 1.1% pace it set in March. Excluding food and energy prices, Wall Street is looking for a 0.1% rise in PPI.
"We're expecting inflation to back off a bit from what it has been recently," says Bill Hampel, chief economist with the Credit Union National Association. "Core inflation hasn't absorbed high food and energy prices. Producer prices have been running at about 7% on an annual basis, and we should see that moderate over the next few months."
Despite the statistics, the daily cost of living does seem to be rising for most Americans.
"You have to look at where the majority of people spend their money," says Spiess. "They spend it on energy, housing, food and transportation. Outside of the declines in home prices, those costs have clearly been rising."
That's why
Wal-Mart
(WMT) - Get Report
executives warned last week that the world's largest retailer was facing headwinds in 2008 despite a solid first-quarter performance.
Wal-Mart's closest competitor,
Target
(TGT) - Get Report
, will report first-quarter results on Tuesday, along with
Home Depot
(HD) - Get Report
,
Staples
(SPLS)
and
AutoZone
(AZO) - Get Report
.
Home Depot's counterpart in home-improvement retailing,
Lowe's
(LOW) - Get Report
is on tap for Monday.
BJ's Wholesale Club
(BJ) - Get Report
and
PetSmart
(PETM)
are due out on Wednesday, and then
Gap
(GPS) - Get Report
,
Aeropostale
(ARO)
and
Dick's Sporting Goods
(DKS) - Get Report
will report on Thursday.
Investors will digest more information about the Fed's thinking on Wednesday, when the minutes from its April meeting are released in the afternoon. The central bank decided at the meeting to lower its fed funds rate by a quarter-point, to 2%.
On Friday, economics will be back in focus when the National Association of Realtors is expected to report that existing-home sales fell to an annual rate of 4.85 million in April. Inventories are expected to grow, thereby giving a sign that more price declines are in store for the national real estate market. That will in turn weigh on the economy.
"The economy will look much better than it has over the next three of four months due to all the rate cuts from the Fed and the tax rebates that are being sent out to consumers now," says Hampel. "After a surge in the third quarter, though, consumers will be struggling again, and the economy will settle back into really sluggish, below-trend, weak growth. The unemployment rate will continue to rise, and that's not a world in which the Fed will be raising interest rates, so we're forecasting that the fed funds rate will get down to 1.5% by the end of this year."