Stocks lower on Home Depot’s warning and looming debt ceiling drama

• 10-Year Treasury yield rose 5.1bps to 3.553%
• Canadian inflation delivers first annual pace acceleration in 10 months
• Fed’s Mester notes they have yet to reach significantly restrictively rates

US stocks are declining after Home Depot delivered a downbeat outlook for the retail consumer and Speaker McCarthy said debt ceiling negotiations have had no progress.  Wall Street is bracing for something bad to happen, but no one has an idea on what will be that catalyst.  It could be a debt ceiling impasse, persistent banking fears, or a much weaker consumer as sticky inflation becomes more noticeable.  

US data

The headline retail sales reading showed the consumer is holding up as purchases rose 0.4%, an improvement from the -0.7% dip seen in the prior month, but slightly softer than the 0.8% consensus estimate.  The core reading, excluding autos and gas surged 0.6%, but a lot of that is inflation driven. Of the 13 categories, seven reported improving sales in April.   The consumer is still able to spend and will probably do so throughout the summer.  It is hard to get a sense on when demand destruction will happen, but we could get more signs when we hear from the rest of the giant retailers.  

Home Depot

Home Depot’s macro backdrop is starting to look a lot worse. The US consumer is no longer into DIY(do it yourself)projects, but rather go on a vacation away from home.  Home Depot lowered guidance for the rest of the year and that could be a trend we see going forward for major US retailers.  The housing market boomed and then crashed and what is happening with Home Depot could be a warning of what will come to the broader retail space.

Oil

Crude prices remain heavy as the dollar refuses to break.  The global economic outlook has too many question marks and that is not giving energy traders a lot of confidence in buying crude.  Right now too much oil is still available and we aren’t seeing meaningful triggers to make the market tight over the short-term. 

The oil market will get tighter as the US starts to refill the SPR and as China’s recovery unfolds.  The initial start of refilling the SPR with 3 million will have a small effect on physical markets but it should help provide some support around the $68-70 a barrel region. 

Gold

Gold is lower as Wall Street awaits a meaningful update with debt ceiling talks.  Gold did not get any favors from an April rebound in consumer spending.  The soft landing hopes are still hanging onto a thread and that is keeping some investors from going aggressive into safe-havens.  Too many risks remain on the table for investors to go offensive. Risk aversion could get a boost from regional banking fears, debt ceiling drama, and a weakening consumer, but it will likely come from a new catalyst.

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