Analysis: RH COST

Stocks are once again under pressure this morning as we get ready to close the books on what has been one of the most challenging stock market environments in more than a few decades.

Over the last four months, there has been quite a bit to unpack as the landscape has evolved and the current battle for the market narrative remains between inflation fighting vs. slower economic growth and the risk of a recession.

Comments yesterday from Fed Chair Powell that it appears to be increasingly difficult to stick to a soft economic landing combined with comments emanating from the European Central Bank summer conference, that the ECB will remain on a rate hike path in the second half of the year are skewing the narrative toward economic growth concerns.

This makes the ISM June Manufacturing Report as well as the final ones for S&P Global's June Manufacturing PMI reports also out tomorrow all the more important in our book.

This morning we received the May data for Personal Income and Spending, which showed personal income chugging along but a sharp drop in personal spending growth to +0.2% month over month vs. +0.6% in April. We'd also point out that April figure was revised lower from the original +0.9% print.

That drop in spending is likely to stoke concerns over the ability of retailers to work down those bloated inventories we've discussed with members. To that point, this morning RH (RH)  issued its second fiscal year net revenue growth warning in less than a month, citing a "deteriorating macro-economic environment".

We've shared with members the monthly Personal Income and Spending report that also includes one of the Fed's preferred inflation metrics, the PCE Price Index. The headline PCE Price Index rose 6.3%, matching the April figure and the Core reading for May ticked lower to 4.7% from 4.9% in April. While both May data points were a tad below the consensus forecast, they still remain at elevated levels that, in our view, are going to keep the Fed on path with boosting interest rates, particularly at its upcoming July monetary policy meeting.

Here's the thing. When we compare the month over month increase in May personal spending, up 0.2%, vs. the month over month increases in the headline PCE Price Index and the Core PCE Price Index, up 0.6% and 0.3%, respectively, it becomes clear that consumers are spending more to buy less. We see this even more clearly in the 3.3% year over year drop in real disposable personal income, the sixth straight decline for that data set.

More than likely this will amplify the inventory dilemma for many retailers, potentially forcing even greater discounts and competitive pressures to move inventory, hitting margins and retailer bottom lines. In this environment, we expect Costco's (COST) differentiated, membership driven business model becomes increasingly apparent with investors.

Later today, we'll close the books on the month of June and 2Q 2022 as it means before too long we will be drinking from the fire hydrant better known as quarterly earnings. With ample trading days to be had before the June quarter earnings season kicks into gear, we'll be watching for any pre-announcements, positive or negative, to be had as well as any expected earnings reports as we update our investment mosaic for what's to be had in the coming weeks.

We'll also be keeping close tabs on the CHIPS Act as it continues to make its way through Congress. Given the growing number of comments from industry leaders as well as the need to re-shore crucial supply chains, we would be very disappointed if the CHIPS Act stalls ahead of the mid-term elections.