Analysis: KR PEP COST

* Stocks are trading off following Chicago PMI data and comments from the Fed's Waller

* A hawkish tone from Powell tomorrow could trigger trader profit-taking following a strong November; we would welcome a market pullback

* Kroger feels the consumer pinch, while Costco thrives

What looked like a solid finish to the vibrant month of November has given way to the S&P 500 and Nasdaq trading off. In our opening comments, we discussed how a few headwinds were brewing that could lead to this even though the October core PCE Price Index came in as expected.

What led to the market's about-face was the far hotter than expected November Chicago PMI (55.8 vs. the expected 45.4 and 44 in October) as well as more subdued comments from New York Fed President John Williams following this morning's data.

While the market read into comments from Fed Governor Christopher Waller, we could see a Fed pivot before too long,  Williams voiced a more balanced view, sharing his PCE inflation forecast is for 3% in all of 2023, falling to 2.25% in 2024 and near 2% in 2025.

That pushes back against the market's hoping for comments that would pull forward rate cut timing by the Fed. Waller's comments are likely going to be in sync with those from Fed Chair Powell, but we continue to expect the market will focus on the Fed Chair's language and tone. Against the market dynamics we discussed in today's opening alert, a more hawkish tone from Powell could trigger more profit-taking as we shut the door on November.

Not to repeat what we said in those opening comments, but we would view a sell-off in the market as an opportunity we are waiting to take advantage of.

Kroger Feels the Pinch, But Not Costco

This morning Kroger (KR) reported its quarterly results, which included comp sales that fell slightly more than Wall Street was forecasting after taking into account fuel. The weaker showing, according to Kroger, was due to tightened consumer spending trends with management pointing out that "although inflation is decelerating, customers are still adjusting to the impacts from eight consecutive quarters of broad and significant inflation."

In terms of what Kroger saw during the quarter, it shared, "Inflation ended the quarter in the low single digits, approximately 270 basis points lower than second quarter. Towards the end of the quarter, we saw inflation decline at a slower pace. We would expect this trend to continue in the fourth quarter with inflation remaining positive at the year-end."

We find that and its in-line revenue guidance for the current quarter reaffirming for Action Alerts PLUS holding of snacking and beverage company PepsiCo (PEP) .

While Kroger reported negative comps ex-fuel for its October quarter, Costco (COST) reported November sales results that clearly confirm it is picking up consumer wallet share. The company reported its November net sales rose 5.1% year over year and more than 8.5% sequentially to $20.14 billion. Total company comp sales for the month were up 3.5% and 4.4% once we exclude the impact of gasoline prices and foreign exchange.

US comparable sales for November came in at +1.8% and rose 3.0% excluding gasoline prices and foreign exchange. Confirming our thinking that Costco would pick up wallet share heading into the holiday shopping season, that 3.0% figure is up from 2.2% in October. Share gains were also had with Costco's e-commerce business which posted adjusted November comp sales of 9.8%, up from 3.1% in October comparable sales were +9.9% and +9.8%, excluding items.

All of this confirms our thesis on COST shares, but it is nice to see others like Citi recognizing the acceleration in the company's sales and lifting their COST price targets closer to our $625 target.