The consumer cracked on Friday. Six retailers answer for it this week. | Week-Ahead Brief #2

Friday broke the consumer story. This week the companies answer for it.

Two prints landed on Friday and both went the wrong way.

July retail sales fell 0.6%, against a consensus that wanted a small rise. That is the largest monthly drop in over a year. Strip out the online category and the core measures held up better than the headline, which is the argument the bulls will make all week, and it is a fair one.

Sentiment is harder to explain away. The University of Michigan's preliminary August reading came in at 51.0, down from 55.2, against forecasts nearer 55. Inflation expectations moved up in the same survey. Falling confidence with rising expected prices is the combination that has historically preceded weak discretionary spending.

Then look at what the market did anyway. The Russell 2000 closed at a record 3,068.42, up 0.5% on the day and about 1.1% on the week, its fourth straight gain. The S&P 500 slipped 0.2% to 7,785.76, just off Thursday's record, but still took a third consecutive weekly gain. The Dow closed at 53,732.41.

Small caps are the most rate-sensitive, most domestically exposed corner of the market. They are rallying on the view that the Fed is finished hiking. That view is downstream of a consumer who is getting weaker. If the retailers confirm the weakness this week, that trade collects its wish and its punishment in the same five sessions.

Overnight, it stopped being an American story

Both numbers below landed while the US was asleep, and I have not seen anyone connect them to this week's calendar yet.

China's July retail sales grew 0.6% year on year. Not month on month. Year on year, down from 1.0% in June, against a Reuters poll wanting 1.5%. Industrial production rose 4.5% against a 5.0% forecast and 5.3% the month before. Fixed-asset investment contracted faster and unemployment ticked up.

Japan's Q2 GDP expanded 0.3% on the quarter, below the 0.5% expected, and 1.1% annualised against forecasts of 2.0%. Private consumption was flat and capex contracted sharply.

This matters for the week directly. Three Chinese ADRs report inside four days: Baidu on Tuesday morning, then Alibaba and NetEase on Thursday. They are now reporting into a domestic demand picture that got measurably worse this morning. A weak Chinese consumer is also the read-through to anyone selling into China, which on this week's calendar means Estee Lauder on Wednesday.

Wednesday is four events stacked on one day

Start with the clock, because the first one happens before anyone rings a bell.

12:01am ET. The 50% Section 338 tariffs on Canada take effect, the first use of that authority by any president. They cover roughly $20 billion of imports, about 5% of what America buys from Canada, concentrated in dairy, alcohol and motor vehicles. It applies on entry date, so goods have to be cleared through customs before the deadline. USMCA origin buys no exemption. Canada said it would intensify talks, and as of Friday no deal had landed. I found nothing over the weekend to say that changed.

Every retail call that morning now carries a tariff question.

Before the open. Target, Lowe's, TJX and Estee Lauder all report. Target's consensus is $2.21-2.23, up about 8%, on revenue near $26.1 billion, into a stock at a 52-week high.

1:00pm ET. Treasury sells $16 billion of a new 20-year bond. Last Thursday's 30-year sale cleared at 5.216%, the highest in Treasury's published auction records. The 20-year needs only a few basis points of concession to set a record of its own.

2:00pm ET. The July FOMC minutes. That meeting held at 3.50-3.75% with three dissents in favour of a hike, the most since September 2016. Chair Kevin Warsh has removed forward guidance from the statements, so this document is the only look inside the split before he speaks at Jackson Hole on 28 August.

A soft auction at 1:00pm running into the minutes at 2:00pm is the one sequence that could spoil an otherwise well-supported tape. Minutes releases are usually filler. This one documents the most divided committee since 2016, at the moment the market has decided the hiking cycle is finished. My own preference is to be flat into 2:00pm.

The calendar

Monday 17

8:30am ET: Empire State manufacturing
10:00am ET: NAHB housing index
After the close: Fabrinet fiscal Q4, call 5:00pm ET, options pricing about 12%
The closing auction: see below

Tuesday 18

Before the open: Home Depot. Consensus $4.71 against $4.68 a year ago, revenue near $47bn.
8:00am ET call: Baidu
8:30am ET: Housing starts and building permits
5:00pm ET deadline: RE/MAX holders elect cash or stock in the Real Brokerage merger
After the close: Toll Brothers, Keysight

Wednesday 19

12:01am ET: Canada Section 338 tariffs take effect
Before the open: Target, Lowe's, TJX, Estee Lauder (call 8:30am ET)
7:00am ET: Analog Devices, call 10:00am ET
1:00pm ET: $16bn 20-year bond auction
2:00pm ET: FOMC MINUTES
5:00pm ET: Wolfspeed
Lyntris prices its NYSE defense-tech IPO under LYNX at $19-22

Thursday 20

7:00am ET release, 8:00am call: Walmart
7:30am ET call: Alibaba
8:30am ET: Jobless claims
Also reporting: NetEase, Deere, Ross Stores
Overnight: China's loan prime rate

Friday 21

Before the open: BJ's Wholesale, call 8:00am ET
9:45am ET: Flash manufacturing and services PMIs
The SpaceX day-70 tranche lands on the 20th or the 21st

Today's oddity: an index seat, priced live

Reddit joins the S&P 500 before Tuesday's open, replacing AvalonBay Communities. Index trackers therefore have to own their weight by today's close.

The size is the interesting part. Estimates run 14 to 17 million shares, with J.P. Morgan at 16.7 million, against average daily volume of 5.83 million and 19.21 million shares sold short. RDDT closed Friday at $178.09, up 12.63% on the announcement.

Whether that gain survives contact with the actual buying is a cleaner test of what an index seat is still worth than anything on the macro calendar this week. Reddit becomes only the second pure-play social media company in the index, after Meta.

The other half of the swap completes today too. AvalonBay's merger with Equity Residential closes, so this should be AVB's last session. Each share converts into 2.793 shares of the combined company, which trades as VMRK from Tuesday's open.

Also on the radar

Walmart's consensus sits at the top of Walmart's own guide again: $0.74 against a guided $0.72-0.74, on revenue near $186.7bn. The last time that setup appeared it produced a miss and a 4% morning drop. The full-year guide matters more than the quarter, and the stock still sits about 16% below its May record.
The trade-down split is where the information is. If TJX and Ross beat while Target and Home Depot miss, the consumer is rotating rather than retreating. That is a materially better outcome for the index than Friday's retail sales number implies. It is also the pair I would read before drawing any conclusion about the group.
Six retailers inside 72 hours are one position, not six. Home Depot, Target, Lowe's, TJX, Walmart and Ross all report against the same consumer. Treating them as independent bets is how a book gets concentrated by accident.
Nvidia reports 26 August, and Warsh speaks at Jackson Hole on the 28th. Jackson Hole runs 27-29 August. Anything held past Friday's expiry carries both.

The one-line read

The market spent Friday learning that the American consumer stopped spending, then closed small caps at a record on the theory that it means no more hikes. Overnight, China said its consumer has almost stopped growing and Japan said its economy is stalling. Six retailers and one set of Fed minutes get to referee all of that in five sessions.

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