Market Insights: Earnings, Retail Trends and Budget Talks

Big box stores Home Depot (HD), Target (TGT) and Walmart (WMT) are releasing earnings this week

• The market faced losses despite strong earnings, with attention on retail trends and budget negotiations.
• Back-to-school sales hint at consumer response to inflation and predict holiday trends.
• U.S. Steel bid, Tesla price cuts and oil volatility highlight market dynamics to watch.

Last week, the Nasdaq Composite faced a nearly 2% dip, marking its first consecutive back-to-back losing weeks since December. The S&P 500 saw a slightly milder decline of less than 0.5%, marking its first back-to-back weekly losses since May. These losses occurred despite a relatively strong earnings season. This week, investor attention turns towards indicators of retail spending.

Earnings reports from major retailers are set to play a pivotal role. Home Depot (HD) is scheduled to announce its earnings on Tuesday, followed by Target (TGT) on Wednesday, and Walmart (WMT) on Thursday. Simultaneously, the release of the latest retail sales data will provide insights into consumer spending trends, with a projected month-over-month increase of 0.4%.

Back-to-school sales, federal budget watched

One intriguing aspect of the upcoming retail earnings is the impact on back-to-school sales. It's particularly noteworthy to observe if consumers are shifting towards discount retailers or even garage sales due to persistent inflationary pressures. Furthermore, back-to-school sales often serve as a bellwether for holiday season trends, offering valuable insights into retailers' expectations for the year-end shopping season.

As the earnings season approaches its conclusion, attention is gradually shifting towards federal budget negotiations. With the current fiscal year ending Sept. 30, the urgency to reach a new budget deal before the deadline is evident. Failure to do so could lead to a government shutdown until an agreement is reached. Notably, recent memory recalls how debt-ceiling negotiations in June nearly pushed the U.S. to default, resulting in a credit downgrade by rating agency Fitch. The unfolding negotiations will be closely monitored to gauge lawmakers' handling of these critical matters.

Bid for U.S. Steel

Shifting focus to individual companies, U.S. Steel (X) made headlines with a significant premarket surge of almost 32%. The increase followed an unsolicited bid from Cleveland Cliffs. While U.S. Steel rejected the offer and is currently reviewing its strategic options, the potential merger could hold far-reaching geopolitical implications for the global steel industry. If the two companies eventually merge, it would create the world's largest steel entity.

Tesla (TSLA) also grabbed attention as it navigates the complex world of pricing dynamics. After committing to not cut automobile prices to avoid a price war, Elon Musk took a different approach in China, lowering Tesla car prices over the weekend. This move led to a 2% decline in Tesla's premarket trading.

Lastly, other notable factors include oil's 0.5% decrease in premarket trading, contrasting with a 10% rise over the past month. This surge has contributed to an average gasoline price increase from $3.57 in July to $3.85. This underscores the potential for oil to ignite inflation swiftly. Market volatility, as measured by the VIX, showed a 5% increase in premarket trading from the previous week's settlement. Although the VIX remains relatively low, this uptick could signify potential changes in the market sentiment in the coming week.

In conclusion, recent market movements underscore the interplay of earnings reports, retail trends, and budget discussions in shaping investor sentiment. As you navigate these intricacies, staying aligned with your investment plan and long-term objectives remains paramount.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan

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