The Latest Sign Of Consumer Struggles… Plus China Stocks Rebound 5/10/24

0:02Live from the Nasdaq Market Site, in the heart of New York City's Times Square, this is Fast Money. Here's what's on tap tonight. Running on empty. Consumers losing that loving feeling about the economy as worries about inflation rates and jobs are picking up. We'll break down how companies are trying to get price weary shoppers to start spending again. Plus, China rising from being called uninvestable just last summer to a major rebound this year. What's behind the big bounce back in Beijing? We'll take you there coming up. And later, not just for boomers, the new generation that's getting the gold bug.

0:32A big week for a semi-giant not named NVIDIA. and on a Friday, have a Coke and a smile. A major winning streak for the soda giant. I'm Melissa Lee, coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Feynman, Steve Grasso, and Julie Beal. We start off with McDonald's latest move to contend with a penny-pinching consumer. News today that the fast food giant is getting ready to introduce a$5 menu to help pull diners back into its stores. That after the company posted its first earnings miss since 2022 in the first quarter. EPS coming in two cents below estimates.

1:04Revenue growth of the quarter, the lowest in a year. McDonald's shares had been struggling since that report, but got a boost after today's news as investors seemed to welcome any relief for consumers. After all, sentiment falling to its lowest level of the year, according to the University of Michigan's first reading for May. And if next week's CPI report comes in hotter than expected for the fourth month in a row, that just adds to the pressure. So is there any relief in sight for the consumer? or will weak spending start to really weigh on the economy and the markets from here? It seems like we've been forecasting the demise of the consumer for a very long time, has not come, has not come, and then we're getting data points now that we are seeing the stress.

1:43Well, and in fast food, we heard from these folks earliest in terms of, and McDonald's is fighting back. And so the question is, you know, do you translate this into promotional activity, which weighs on margins? McD's has been pretty solid in terms of the margin growth. They've had a huge lift from their loyalty, their digital and transformation that really over the last five years has been nothing short of extraordinary. So the question is, what do you want to pay for the company in this environment? Their consumer is under pressure, but their business is not, is my view. And I think you're still a little early coming back into a multiple on McDonald's that says there's all kinds of value in the stock.

2:19It's not a five dollar buy here. In fact, it's still trading, you know, kind of 22, 23 times. And I don't think that that's crazy cheap, even though we know it was up in the high 20s. But if you look at the other competition, it's not that the consumers are not spending money. They're just not spending it at McDonald's. So if you look at Sweet Greens, you look at Cava, you look at Shake Shack, Wingstop, Domino's, those stocks are killing it. So it's a McDonald's problem, not a fast food problem. Right. I mean, a lot of those a lot of those competitors, though, are not truly competitors in that it's a higher price point.

2:51A Cava and a Sweetgreen are much more akin to a Chipotle, for instance. Exactly. But we talk about the consumers if it's a monolith of consumer. And in fact, it's a very, very stratified group that consumers who are, you know, at the low end of the dollar stores. And I don't know if McDonald's is the low end, but certainly relative to the Chipotles and the Sweetgreens, it's much lower end. And so people who have who have assets who have been in the market are feeling pretty good. Right. Their jobs feel pretty good. Some even lower end consumers. do feel like they're getting raises, so they feel good.

3:24But so I guess there's sort of a tale of two or many more consumers. And if you're doing okay and you're, you know, in a reasonably high category, then you're doing well and the places you shop are doing well. But Domino's is low end, right? You would agree that's low end. I would assume that's, I don't know if it's the same as McDonald's, but it's sort of in the same ballpark. Where Chipotle and Sweet Greens I would put, you know, very close. I almost think it's the growth story where there's the smaller players that maybe have an international carrot on a stick, if you will, where they can they can expand their growth.

3:59And maybe it's the more exhausted ones. But Domino's is sort of a more mature story. So it can't it doesn't really cover all that. But it's it's the McDonald's is mature. So just to pull back just a bit here, I mean, I guess we're sort of asking the question, at what point are we going to start getting concerned about the consumer? And we ask this on the precipice not only of CPI and PPI next week, but also a slew of retail earnings, including Target, Walmart, Home Depot, Lowe's, you name it, all reporting the next couple of weeks. Julie, it seems like increasingly so many names are indicating that consumers are pushing back on price.

4:32I mean, even if you go to, you know, Starbucks as a recent example, the occasional customer is not going as frequently. And that occasional customer, I bet, is probably employed still and probably has some money in the markets or is feeling OK, but has decided to, you know what, I'm not going to spend that$4 on a coffee. Yeah, I think that's exactly right. And I think the way Karen phrased it is the way, right? Asset owners are feeling fine because they've benefited from stimulus spending and everything that's happened in the market and also from higher rates. Asset, you know, people who have more debts than asset, they are feeling much more of the pinch.

5:07And inflation has really, really made it much harder for them to divvy out that paycheck in ways that they feel a lot of control over. It's true that they've had the most wage growth, but they also have a much higher share of very exposed inflationary items, including gas and everything that's happening at the grocery store. I think next week is absolutely critical for more understanding of the lower end consumer, because once that starts to falter, I think that starts to really ripple. And if you think about recessions, right, recessions, the declines that you see in demand, they're not from people who lose their jobs.

5:42They're from people who are afraid they're going to lose their jobs and are pulling back on their spending. And that's what really crimps demand meaningfully. And that goes back to the jobless claims. We know hardly ever do we really focus on jobless claims. But this pop to eight month highs is notable, even despite the seasonal factors involved there. And a 22 ,000 uptick and again, a miss of consensus on jobless claims is what you talk about because you're like, hey, what was this? Even though it's a volatile series and we're still at historically low joblessness. So it's a week where people who want to believe that the consumer is falling apart, believe it's just a matter of time before you start to see this pull back.

6:19The other side of this, what we heard today out of the Fed and different Fed speakers is ultimately you've got an environment where they don't necessarily see inflation coming down anytime soon. that they're actually worried about, you know, you get some comments out of the Dallas Fed saying we're not so sure that there's a there's a sense that the risk free rate, let's just call it the have restrictive policy is a better way to say it. And they don't think it's overly restrictive. So it gets back to in different places we've been hearing about the consumer. I would go back to McDonald's because McDonald's also has an opportunity to play up.

6:54In other words, part of what they were talking about is they're actually going to be getting into growth food segments. They're going to be maybe getting into into a little bit more of a fast casual. They have an international initiative. Steve talks about the international side for a lot of these companies is where you get it. I think that's where you're getting it from Domino's. So I think this is McDonald's comments are as much about how they're trying to position their business and warn people that, hey, look, we're going to do what we have to do in our core. But we're actually excited about other parts of the demographic consumer chain.

7:22And even for a Walmart, for instance, you might think, oh, that's a read on the lower end consumer. but it's also over again on the higher end consumer because of their commentary about households with$100 ,000 or more increasingly shopping at Walmart. If that trend continues, Karen, that's a pretty interesting data point in terms of the psyche of the better off consumer out there. I guess you could look at that. That makes sense. I do also think that there's something like you can you see also very high end consumers or high-ish end consumers at a Costco or somewhere like that because they love it.

7:52Right. And they just think this is incredible value and it's sort of fun. And so they could shop there and they could shop anywhere. Do you find Costco fun? Oh, I would guess no. Am I right? You are correct. I'm just trying to understand. But Lawrence loves Costco. I can see that. Yeah, it's totally fun. I don't know. I think that Target will be a little more interesting to me because I've been concerned. I don't own it anymore. I sold it poorly. I've been concerned about Timu and Xi 'an taking share from them in that higher margin, and then they can't compete as well as Walmart on the groceries, which has really been huge for them to draw in customers.

8:30Costco's chart looks better than Walmart's chart. Walmart's chart looks okay, but I think you're right. I think now they're really catering to every income bracket. But we saw studies this week. We saw data out every income bracket is doing better off than they were pre-pandemic. Every one. Based on? Based on net worth. Based on net worth and the amount of debt that they're carrying. So we're not there yet. Is that all home and stock portfolio mostly? Lower end don't own homes, do not own homes. So it's just about a paycheck. So wages have increased. Karen brought that up earlier. So they're richer, quote unquote, than they were pre-pandemic and they still have savings.

9:12All right. Julie, which report will be most key to you? I'm really interested. I think housing is so critical to understanding the overall outlook. So many Americans, that's really where their store of net worth is and their sense of confidence. And so I'm really curious about how Home Depot is going to be talking about the DIY and the professional. I'm really kind of curious to see, are people still out there shopping and trying to buttress this asset that they have? And a lot of people are really kind of stuck in their homes with these ultra-low mortgages. They can't move either way. So that's the place that I'm the most curious about.

9:48Seasonally, it's also a good time for Home Depot and Lowe's planting season. I know I will. I know I will be there over the weekend. But what we've also heard from Home Depot is that their pro business remains strong. It's a high margin driver for the business. It's a real support valve for the business that the mix of some of the durables and some of the consumables there that were very, very high demand items during COVID, whether it's grills and outdoor furniture and this kind of stuff, I don't think they have the same demand cycle. So it will be interesting. I think Home Depot is very defensive.

10:17I love the pullback. I think the valuation is interesting. It trades at a premium to Lowe's. I think Karen's more of a Lowe's person, maybe. Yes, I have both. But yes, more Lowe's than Home Depot. Just on the valuation spread, I think was big. But I'm a little worried. I'm really worried about why we saw was it Masco with and Black and Decker. Black and Decker with some weaker numbers. There was some commentary out of I think it was Home Depot about builder supply. There's what is the doormaker Jensen Welder also weak. So a lot of these sort of, I don't know, I don't think of them as idiosyncratic, but I think a lot of components of what would be good business for the Home Depot and Lowe's of the world was a little lighter than I would have liked.

10:55And it sounds like the components specifically for professionals, for contractors. Both. Yes. Yes. Yes. That's true. And if rates do come down, home equity loans are going to be more prevalent. People take out a home equity loan. will put maybe they were there sitting, as Julie said, they're trapped married to that mortgage, but they're more apt to go out and spend that money with a home equity loan at a Lowe's or a Home Depot and just do some renovations versus having to move. All right. Meantime, the Treasury releasing new data on its income and spending and the numbers are staggering, particularly when you look at how much we are paying in interest.

11:28Megan Cassell is in D.C. with all the details. Hey, Megan. Hey, Melissa. So the U.S. government spent$102 billion on interest on the debt last month, setting a record for the month of April. Now, that's a 35 percent increase from the same month a year ago as the deficit grows and interest rates remain high. Fiscal year to date, interest payments are up a similar 36 percent. And for five straight months now, they've been rising faster than any other line item in the Treasury's budget. A couple other increases last month. Social Security spending was up and adjusted 6 % from last year because of that cost of living adjustment.

12:01Spending at the Department of Health and Human Services was up 64 % as spending rose for Medicare and Medicaid, although after adjustments due to a quirk in the calendar, spending at HHS was up just 7%. For the fiscal year so far, Treasury is running an$855 billion deficit. But it's not all bad news. That's actually 8 % smaller from this time a year ago. Melissa? Yay. Megan, thank you. Megan Casella. Staggering. I mean, no surprise, though, right? We've been getting at this for a long time in terms of how much more it's going to cost for this debt. All of a sudden, we're in this situation. And it's both parties, actually.

12:40Neither one wants to be the one to rein things in. And I think it's just going to happen until something breaks. They're not going to fix it before that. And I don't know what that'll be, if that's a failed auction. I heard Social Security, was it the other day, talking about 2034? Social Security would be... We've been hearing that for our whole lives. We've been hearing that for our whole lives, and they keep pushing it off. They were supposed to be flying cars here, too, by now. So we didn't see that. But yeah, insolvent by a certain time. It's scary. That's the number one fear, I think. All right.

13:11Help to break us down the government spending data. Next week's CPI report and more. SMBC NICO chief economist Joe Livornia on what we can expect. Joe, great to have you with us. Thank you, Melissa. What's your take on the consumer? We were having this discussion about the consumer and where the cracks are and certain consumers are under more pressure, et cetera. What's your what's your take on overall consumer spending as relates to the component of the economy? It's a it's a big piece, obviously, 70 percent of GDP and consumers will keep spending as long as they have jobs. And at the moment, they still have jobs, which is good.

13:45However, where I do foresee a problem is on the good side, because if you look at the pre-pandemic trends, we're about 8 percent above the pre-pandemic trends, with generally credit conditions starting to tighten a bit more from where we were a couple of years ago. Interest rates for a lot of durable borrowing for how home certainly appliances, furniture, those rates are high. At some point, that will slow. But the first thing, Melissa, the labor market really has to weaken. The consumer always, even whenever the next recession comes, always generally looks pretty good until all of a sudden the consumer does.

14:19In other words, consumer spending is the measure of current activity. As much as we try to look at various company reports and what the guidance is, consumer spending never tells us about where we're going. It's the confidence numbers you were talking about at the top of the show. But they were lousy. They tend to be more forward-looking. Of course, they were lousy. That's right. That's right. So what does that tell you? Well, here's the thing. I've come full circle. What it tells me, Melissa, is that the inflation data is likely, and I'm not sure exactly why. I've got some theories, but the inflation data is all of a sudden now look really poor.

14:53Next week is likely to be four months in a row. If the economy doesn't slow, if this no-landing scenario continues to play out, then the Fed has to keep rates high and maybe even hike rates so as to slow the economy and moderate inflation. The only way out would be if you got a big increase in productivity growth, such that potential GDP is higher and all of a sudden inflation starts moving lower again. That could happen, but that to me is a low, that's sort of a little bit of a fairy tale. It doesn't sound like it's likely to happen. So it's going to rest on the Fed and then you do get the downturn.

15:26But when that is, it's very hard to say. So, Joe, great to have you. Let's get to another fairy tale that the U.S. is going to actually balance their budget sometime soon. I mean, for 50 years, we went 2 percent of deficit on the budget, on budget at a 2 percent deficit. The last one I saw was over six. This matters. And it probably also makes GDP higher. So at what point do you put your kind of credit hat on? We kind of scoff at the credit agencies when they downgrade. But this is real and it's not going to change. Real. Yeah. So you look at the CBO numbers. They've got the 10-year note at roughly 4%, 4-2, 4-3 for the next 30-odd years.

16:05There's no recession, unemployment low. And the deficit goes to about 9%, close to 9%. So clearly, there's going to be an issue. Now, fast forward to next year. And let's assume we can make whatever assumptions we want to make about who's in office. But the deficit numbers certainly going into next year will remain terrible. We're running 5%, 6 % budget deficits with unemployment at 4%, slightly below. That's unheard of. The rating agencies, if you remember, when they downgraded back in 2011 and when they warned in the past because of the debt ceiling, it was politics. And if the politics don't get better, as Karen was saying, there's going to be some fragility there.

16:44So the rubber may meet the road, Tim, next year, but there's certainly no way we can keep the spending going. And part of it, though, is the Treasury's own mistake by basically 80 percent of all the net issuance in the last year has been within one year. And that yield curve inverted is the reason why, as we were saying before the segment began about interest payments, they're high because the curve's inverted and the Treasury's financing everything at the front end. Joe, it's Karen. Let me just push back for a second on the productivity thought that you had. Is it possible that there is greater productivity than we think?

17:17I mean, how else would we explain the GDP numbers that have been so strong this last 1.6, I guess, notwithstanding, but, you know, in the threes? is that not due to some significant productivity gain? It is due to some significant productivity and productivity growth has improved. We've seen labor force participation, although it's still below where it was in 2020, beginning of 2020. It's come back. So that's part of it. But if that's the case, though, Karen, we should start to see these inflation numbers quickly move lower, because if there's more slack in the economy, because the economy's potential is higher, because productivity is higher, then inflation is supposed to move downward.

17:53And consumers, you talk about McDonald's, the numbers today out of Michigan were very surprising. I was surprised to see those inflation numbers, especially with gas prices, kind of OK at the moment. They're not really spiking much. So to me, there's a lot of angst and stress out there on the consumer side because living standards have fallen because inflation is so high. And that likely is a function of the fact the government's been spending way too much money. We've avoided recession, but we're paying for it on the price side. So, Joe, I'm going to take it from a different angle. Shelter costs are over 30 percent of CPI.

18:25So is the Fed sort of backed himself into a corner where they have to cut rates because that's the only way shelter costs are coming in? And if shelter costs are tied to CPI, that's the only way CPI is coming in. So if they don't cut rates, you're actually not getting lower inflation. I heard that. I don't know if I believe that argument. But I'll give you the easiest way to answer it, Steve, is that the Fed focuses on the core PCA and the rental piece in the core PCA is about a third of the size. If we take the core PCA and we break it between the cyclical and the structural or the non-cyclical pieces, we need about a two and a half percent drop in the core, the cyclical part of the core PCA.

19:08And that doesn't happen outside recession. So what I think winds up happening is CPI might come down because of the rents. And if the Fed cuts someday, rents will come down. But what the Fed focuses on is not heavily rental driven. It's health care driven and health care costs are not coming down. Joe, thanks for coming on. We appreciate it. Nice to see you. Thank you, everybody. Thank you. Yeah. So he said no, basically. He said no. And a lot of people say no. And a lot of people, you know, I don't want to be part of the consensus. But I think that when you when you when you look at that, it's the holy grail for me.

19:42So costs do come down. If interest rates come down, I think costs come down, both health care, insurance costs, rent costs. Or if unemployment if unemployment goes up, then housing costs will come down. People can't afford their I mean, natural press on the on the market there. I think that's right. But I don't right now. The fact that housing costs are as high as they are with people with the joblessness as low as it is, I think is more of a function of housing, structural housing dynamics. But there's no question. The consumer needs to weaken up. And we're almost kind of waiting that to do a lot of other analysis that just right now is speculation.

20:16Consumer's fine. Coming up, a Friday chip rip. Taiwan semi-surging after hinting at a strong start to the quarter. We'll take a closer look at the numbers and some of the other major moves in the semi-space, plus a whole new generation of gold bugs. The commodity's record run has young investors grabbing up as much of the precious metal as they can. what that means to the markets right after this. This is Fast Money with Melissa Lee, right here on CNBC.

20:51Welcome back to Fast Money. Two chip makers topping the tape. First up, Arm Holdings jumping 5 % today, more than recouping its losses from Wednesday. Warning on guidance. Taiwan Semi gaining almost 5%. The company reporting revenues in April were up 60 % from last year. It's AI business playing a big role there. They also came out with an increase of the dividend. Tim, you pointed this out. This is a very good sign for demand. I mean, that jump month on month was extraordinary. They gave great insight into the recent sales numbers. They pointed out also just where they're upgrading their dividend to a place where, you know, you're going to have, you know, Yeah, it's going to be something along, you know, 30 a share.

21:30They've increased this. They're going to almost have doubled it by 2027, which tells you a lot about demand. This is a company that to me really is a cash flow machine if they want to be. We know they're reinvesting at the same time. We also know that they're working. They are a strategic partner to not just the U.S. government, but the Japanese and many other governments around the Chinese sort of kind of, you know, we'll see. But it's a stock that also has had a lot of volatility in it, along with the cyclicality of the semis. But if you bought the stock in November of 22, you're up two and a half times.

21:59I mean, this is a stock that I think you want to be buying on any weakness in general over the next five years. And plus, they pointed out their AI angle to this is still in low teens growth. So there's a lot of growth there left for them. But I thought the recovery in cell phones and smartphones was interesting. So Arm has a 90 percent share in cell phones. This is positive for them and Apple. Yeah, I mean, I mentioned the month-on-month jump, Julie, in revenue is 21 % month-on-month, which really tells you that there was something that happened with the change in the calendar that really goosed it for TSM.

22:35Yeah, I think that's the tricky thing with a lot of these businesses is they all have these anomalies in terms of how they record revenue, how their business ramps cyclically, seasonally. It's a little bit tricky to keep track of. But what I think is important in distinguishing between these two businesses is the capital-intensive nature of TSMC, to me, makes it a less attractive business than Arm. Arm is the blueprint maker. And as such, it's much lower capital intensiveness, and they have such high levels of market share. So I think between these two, that's the more compelling case right now.