Hold up, Fed hawks.
The market has tanked this week on fears the Fed is preparing to lift interest rates in June. Minutes from the last Fed meeting were decidedly hawkish. Fed governors such as William Dudley and Dennis Lockhart are out there hinting strongly that a second rate hike is coming soon. Their position seems to be that the economy is fine, and the consumer spending slowdown seen in the first quarter is nothing more than Mother Nature jerking things up. I mean, who wants to get in their cars and visit the malls in the rain? As if!
Might want to take a step back, guys, and do a thorough read of Walmart's (WMT) first-quarter results. Without question, the start to the year for the world's largest retailer was good for its own narrative (especially headed into the key annual meeting on June 3). The company continues to impressively bring inventory levels down in the U.S., is seeing improved customer satisfaction scores thanks to better customer service and didn't stick its second-quarter guidance in the toilet like so many others out there in retail have in the past two weeks. Even Walmart international (excluding the U.K.) did OK. But Walmart's results did show a few alarming things from a broader macro standpoint that should have Fed officials assessing whether a rate hike is a wise move.
Personally, I don't believe the consumer is in such a great frame of mind to re-accelerate their spending into the summer -- many continued to under-call the impact of a volatile election season on how people are consuming goods and services.
Here are a couple of the considering aspects to Walmart's results:
U.S. same-store sales: The company told us fine folks on a media call that it saw consistent sales results in each month of the quarter. That is the complete opposite of what every other retailer experienced. Home Depot (HD) and Lowe's (LOW) saw sales growth slow sharply by April. Target's sales seemed to fall off a cliff post-Easter, leading to its disappointing second-quarter outlook. Department stores such as Macy's (M), Kohl's (KSS) and Nordstrom (JWN) have next to no momentum going into the second quarter. Yet there is mighty Walmart U.S. showing consistent sales growth at its supercenters and big-time strength at its grocery store concepts called Neighborhood Markets.
I think the company right now may have to be viewed as the greatest economic tell we have -- consumers seem to be trading down to Walmart, which happens to have lowered prices on a ton of items during the first quarter (hmm, wonder why they did that ... it was unlikely because the U.S. economy is heating up!). If Walmart misses its second-quarter sales plan and Target (TGT) shocks us with something positive, then it would be fair to say the first quarter was a blip in consumer spending. But until then, I think you have to approach economic outlooks and all consumer stocks with a heavy dose of caution. And yes, that also means any hawkish Fed comments should freak you the hell out -- higher rates would be unwelcome at this time.
Deflation: The dreaded "D" word was one of the most commonly used words on Walmart's pre-recorded conference call. Grocery items in the U.S. stores continue to be deflationary -- and this is not Walmart-specific, I am seeing it at just about every other grocery store format --see Costco (COST). In fact, I am also seeing it within the apparel sector, which is helping them somewhat protect profit margins (though not fully due to Internet apparel buying and fast fashion). In my view, deflation is running rampant and those at the Fed clinging to this opinion that inflation is lurking might want to get checked out by a shrink. The only true inflation out there is in rents (thanks to the Fed's low interest policy) and health care (thanks to Obamacare) -- and this isn't the type of inflation that signals a healthy economy, it's more a result of government meddling. (Target and Costco are part of TheStreet's Action Alerts PLUS portfolio.)