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 add to the already large US fiscal deficit. The bond market moved little on the news. Perhaps fiscal profligacy was priced in. Email us: unhedged@ft.com

Retail results

How is the US consumer holding up? And what will be the effect of higher tariffs on consumer prices?

These are two of the biggest questions facing US markets, and they are interrelated. Happily, over the past week or so, we have received some insights into both. A series of important US retailers have reported results, including “big box” players Walmart, Target, BJ Wholesale, Home Depot, and Lowe’s; as well as specialists TJX, Ross Stores, Urban Outfitters, Ralph Lauren and Williams Sonoma.

On the health of the consumer, there has been an apparent contradiction between two sets of indicators. “Soft” data from sentiment surveys and the like looks terrible, but “hard” data on employment and consumer spending have been solid. The retailers’ results, quite clearly, refute the bad soft data and confirm the good hard data. The only chains posting negative same-store sales growth were Lowe’s (which is struggling with a frozen housing market) and Target (whose business model and strategy has been wobbling for years).

While the companies say — as they have for several quarters — that customers are “focused on value”, and at times hesitant about big-ticket purchases, it’s hard to find any signs of a recent slowdown in the retailers’ results. The head of Walmart’s US business said that consumers “remain . . . consistent. And we continue to see customers prioritising value and speed of delivery. We have seen growth across all income cohorts in the quarter.”

And while every company nodded to higher uncertainty, almost all of them kept their annual sales and profit targets in place. The notable exception was Ross Stores, a discount clothing chain which sources more than half of its products from China. It withdrew its previous targets because of the “varying nature of tariff announcements”. 

Which brings us to the question of prices, where the picture is less clear. Part of this has to do with the sequencing of the reports. Walmart reported on May 15th, and said, with admirable plainness, that “given the magnitude of the tariffs, even at the reduced levels announced this week, we aren’t able to absorb all the pressure given the reality of narrow retail margins”. One analyst asked why Walmart didn’t see the tariffs as an opportunity to cut prices and take market share from weaker rivals. Chief executive Doug McMillon replied that the company would

. . . watch what customers are telling us and the response that we get from them and the pressure that they’re feeling. So the bottom line is, if we need to invest more [in low prices], we can. Having said that, I really want to grow profit faster than sales. Like we’ve been working on this for a long time. I think we deserve that. You guys [investors] deserve that. And we can navigate this in a way as we balance all the interest between customers, shareholders and everyone else such that we can keep prices low enough to help people and grow profit faster than sales.

To Unhedged, that’s a nice statement of how corporate capitalism is meant to work, but the US president disagrees. Donald Trump wrote on Truth Social that Walmart and their Chinese suppliers should “EAT THE TARIFFS”.

Retailers who reported after Walmart seem to have taken notice of the president’s displeasure, and described their price strategies in circumspect or vague terms, often with reference to “portfolio pricing” (prices seen as a whole, with increases netted against decreases). A Home Depot executive hedged the issue like this:

We intend to generally maintain pricing across our portfolio . . . we don’t see broad-based price increases for our customers at all going forward . . . It’s a great opportunity for us to take share, and it’s a great opportunity for our suppliers to take share as well.

“Generally”; “Broad-based”; interpret these qualifiers however you like. Several other companies said they were committed to remaining price competitive. Most said they had “many levers” to pull to offset tariffs, of which price was only one. And so on. 

Reading between the lines, the industry line on price increases is: some prices are certainly going up because of tariffs; we’ll see how customers respond; and we’ll take it from there.

Long bond yields

The long end is rising. And not just in the US: 30-year bond yields are rising across developed economies:

In recent weeks the US fiscal picture has worsened as the Republican budget has come into focus, and there are concerns about foreign investors rebalancing away from the US. The price of credit default swaps on the country’s debt has risen.

While none of that is true in Japan, Germany or the UK, global yields still follow those of the US. “When interest rate volatility goes up in a particular part of the US curve, that term premium moves across other countries very quickly. [Rates are] highly correlated,” says Ed Al-Hussainy of Columbia Threadneedle. Talk all you want about the end of US exceptionalism, US Treasuries are still the basis of the global rate system. If US long bonds are plunging in price, and offering more attractive yields, the rest of the world will feel the gravitational pull.

That is, with the possible exception of Japan. There, moves in the long bond may be contributing to the fall in Treasury prices, not just responding to it. Japan has had its own monetary struggles over the past few weeks. James Malcolm at UBS explains:

The Japanese situation is specifically Japanese. Primarily, there is a very large amount of Japanese government bonds that need to be issued and refinanced every year. [In the previous monetary regime], the BoJ was an enormous buyer of net new issuance. The market got used to absorbing very little supply . . . [With the end of BoJ’s quantitative easing], now the domestic market has come to the realisation that it has very little capacity to take over from the BoJ.

With an ageing population and new defence commitments, the Japanese government still needs to issue a lot of debt, but at the same time the BoJ wants to shrink its balance sheet. Other natural JGB buyers, particularly life insurance companies and pension funds, are facing financial pressures, too. We saw all this at work in a dismal JGB auction earlier this week. 

Of course, as we learned during the carry trade panic of last summer, Japan’s rates and currencies are tied to the rest of the world’s. Albert Edwards at Société Générale writes that:

Japan’s bond market isn’t isolated. It’s the keystone of global yield suppression. For years, Japanese institutions propped up the global bond market through the yen-funded carry trade and massive foreign bond purchases, especially US Treasuries.

The carry trade — borrowing in low-yielding Japanese assets to buy higher yielding global assets — is widely believed to have contributed to higher global asset prices, including Treasury prices. JGB yields rising fast shrinks the rate differential with the rest of the world, making the carry trade less attractive, and pulls US and global yields down.

This is all a bit speculative. The size and influence of the carry trade is hard to measure. But we do find the reciprocal nature of global bond moves interesting. The US is contributing to Japan’s bond moves, and Japan might be doing the same to the US. And the pattern looks self-reinforcing.

(Reiter)

One good read

Arms procurement.

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