The Unbreakable Consumer? 10/17/23

0:01Live 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. The big splurge seems like nothing can stop the American shopping spree. Not rising rates, inflation or instability around the world. How will the markets and the Fed deal with this very confident consumer? We'll debate. Plus, semi slump, the sector getting hit as the Biden administration announces new export restrictions on AI chips to China. We'll break down how this will impact our already frayed relations with Beijing. And later, stream interrupted. Shares of Netflix falling hard over the last three months.

0:36Will earnings tomorrow remove the chill on the stock? The options action on that straight ahead. I'm Courtney Reagan in this evening for Melissa Lee. On the desk tonight, we have Tim Seymour, Karen Fireman, Bono and Eisen, and guest trader Stuart Kaiser. He's head of equity trading strategy at Citi. And we begin with the unbreakable consumer. We've heard from so many CEOs about how spending is buckling, But the data is telling a completely different story. Retail sales last month jumping 0.7 percent, almost half a percent above estimates. Retail stocks ripping for the second straight day. The strength coming even as yields continue to rise.

1:13The 10-year, getting back to the highs hit last week, which takes yields back to levels not seen in nearly 17 years. So how do we go from a tapped-out consumer and a market gasping for air from painful rates to this? I mean, Tim, it's pretty unbelievable. And I know when I see the retail sales data from the government every month, I know it's lagging. I know it's a little imperfect when it comes to a survey. But it's what we have right now. And it was way stronger than expected. And it's not lagging that much. First of all, welcome. Great to have you here. Great to have Stuart here. And, you know, my view is, first of all, the consumer with a job has proven to be much more resilient.

1:48What's striking about this number is, again, if you look at the retail sales, the control factor, the essentially element of this number, this is on pace for a six plus percent GDP third quarter. Nobody called for this. And so if you think about, you know, Powell's going to speak tomorrow, there's going to be other Fed speak. The Fed, we know, is is is not just concerned. I mean, the Fed is well aware of the resiliency, the labor market. We've talked about this. Every number we get, whether it's jobless claims or even a more backward looking payroll number, tells you there's been zero weakness in this job market.

2:19Retail stocks. Meanwhile, if you look at the XRT, which I don't think is a great barometer, But if you take outside of Walmart, but you look at the dollar gens, the dollar trees, we know that the lower end of the consumer, look at Target, those that have had a tough, tough part with their mix. But then apparel and discretionary retail has been bombed out. And so if you think about it, it's not you know, we look at the markets and I think markets might even make some new highs between now and year end. But retail sales have been one of the dynamics that have given you some sense that the consumer is in a much better place than we think.

2:48So, you know, I look at 10 years. This is a closing high on the 10 year today. So 483, the fact that the 10 years sold off a point and you had equities hold serve tells you there are parts of the market that are way overdone to the downside. And I think that's part of what we're seeing here. Karen, you're invested in a lot of consumers, consumer names. When you look at the retail sales, does it give you confidence going forward? Do you look at it and have some question marks? I mean, how do you square all this with all these pressures that we're facing? Right. Well, we were talking a little bit in the green.

3:19It doesn't give me confidence. It doesn't give me great confidence in the numbers, actually, to be that far off. I hope they're right. That would be good. You know, to Tim's point, the space has really been bombed out. So this this is very contradictory to what what investors are expecting. I don't know if, you know, as the quarter went on, we did see gas prices actually start to fall meaningfully. We know that when gas prices go up, that hurts the consumer. And so that's a little bit of a benefit. The rest, I can't exactly explain, except for they have jobs. Right. And sticky wages. Maybe it's not, you know, still inflating wages.

3:56Just the rate of inflation is slower. Jobs definitely seems to be the key. I mean, Barwin, there was a Deloitte survey that was out today, too, and talking about consumer spending and what they were planning to do come holidays. Yes, that is some time off. But of the consumer survey, the Deloitte survey showed I think 17 percent had student loans that were resuming these payments. But less than half of them were actually going to change their spending habits as a result of that, which surprised me. Yeah, although, you know, I think the surveys are a bit tricky. You know, it's like, what are people saying versus what are people doing?

4:28Right. And then when you start to drill down into the numbers, I think it's a bit more sparse than we're kind of giving credit credit to. So you look at electronics and you look at clothing. Those are actually down just shy of a percent. Right. And those, to me, I would think there would be a lot more confidence when you're spinning on those type of goods, particularly on the electronics, because that's a bit more, not durable, but at least like a lasting type of good. You look at some of the higher-end retailers, RH, LVMH, you've seen how those shares have traded down. So I do think there are still some concerns and headwinds there.

4:58I think we've just gotten so negative, and I think the two previous panelists have already spoken to it, that the stocks have probably gotten a little overdone because we haven't taken the expectations down so much. With that said, the equity price that we're paying now is a Ford-looking metric, right? And so if you don't think that there's headwinds facing the consumer coming down, again, we've mentioned delinquencies. We've mentioned an uptick in credit card balances. We've mentioned an uptick in rates. All of those things are headwind for the consumer. And right now, we do see that the consumer has some leverage in terms of UAW and Teamsters and being able to push wages higher.

5:28But at some point, that is going to come to an end. And when that capitulates, I don't really want to be in this particular sector of the market. Yeah, it seems like we're all a little skeptical, perhaps, of what these numbers show and what that means going forward. Stuart, what's Citi's view of the consumer right now when you're trying to put all these data points together and you're trying to square up what's happening with equities, too? Yeah, I mean, I largely agree with the views around the table. I mean, the market's tried to pre-trade this weakness in the U.S. consumer and the weakness in the economy multiple times this year, and they've gotten frustrated with it.

5:54I think if I take a step back and I'm a worker, I see jobs are plentiful and I see, you know, my peers getting raises or fighting for them. And those things are going to give me confidence that I can find a job and that my wage growth is going to be positive. So I think that's what you're seeing in the data. I mean, our credit card spending data looks weak. It looks weak at the headline and it looks weak below the surface. But it's just not realized in the government economic data. So, you know, I think our view is if you're worried about the U.S. economy, the consumer is where we need to see the weakness.

6:23And as long as that payroll data stays strong, you know, our view is you can run long equities. And the fact is that's happened. And also, this was a positive revision to the previous month as well. This wasn't just a beat. It was a beat and a raise, so to speak. So I think, you know, from our perspective, the growth data remains solid. And if the growth data remains solid, you can continue to run long equity risk. Can I ask you a question? Yeah. You're the boss. No, yeah, go for it. So when you look at your data versus the government's data, how confident are you in your data being closer to what's actually happening than the government?

6:53It's a great question, Gary, because a lot of third-party providers, so to speak, have data that shows weakness or strength that isn't reflected in the government data. I mean, I think on an average basis, let's say a three-month moving average basis, you'd expect the credit card data to tighten up pretty well to the government data. We were expecting a much weaker print today on retail sales than we got. So that either means our data is not indicative or we're ultimately going to see retail sales actually come back to us. So we have confidence that we have a lot of credit cards out there, and we have obviously a very good view on the spending that's there.

7:24So, you know, we're a little concerned about where the consumer is going without a doubt. It's interesting. I mean, when you look at the weaker parts in the report, Tim, and you see appliances, electronic spending, that's lower. Right. A company like a Home Depot or Lowe's, they will often try to tell me, well, it's not discretionary if you're going to buy a washing machine. If it breaks, you have to buy it. But so many people went through these replacement cycles that they're not buying them now. And that's not a reflection of the consumer. Do you buy into that? Well, I am buying into it if it breaks you by.

7:52I mean, I feel like appliances, how did they get to be disposable? And I feel awful about this as a citizen of the world, but it does seem to be cheaper to buy a new one. Again, I would look at the breakdown of where I think the consumer has shown some signs of weakness and where we know this from a Target. We know this from a Walmart. We know this from Amazon, that the mix in terms of discretionary spend has moved more towards services, more towards experiences, more towards restaurants. I mean, the restaurant numbers in here, restaurants and bars were very strong and up more than nine percent for the year, I think.

8:26And meanwhile, you would think that restaurants are getting hit everywhere. We hear about the wage increases at minimum wage at fast food in California. That's going national, folks. The dynamic, I think, around where you, look, I think discretionary, and I continue to, you know, as a guy that was short Nike for a while, I covered that. I've been short Lulu for, you know, the last six weeks. I just, I don't think the multiples here are warranted. That's the big thing. But then I look at other parts of the consumer, and I look at what's happened to staples, you know, and I look at consumer staples.

8:58So I'm not talking about, I'm talking about things that people buy, and you'd think they'd be giving some ground. And granted, these are supposed to be resilient. That's what they are. But these are down 20 to 30 percent. So I just back to this market retail sales from the middle of August when rates started to shoot up. The XRT is not really the fairest barometer, but it's what we're talking about today. Underperformed the S &P by seven and a half percent over six weeks. And over the last three days, you've had a massive move. And again, things like, you know, Children's Place and Dick's Sporting Goods and Macy's.

9:27I mean, these are things that have been destroyed. And I think that's part of what today's move feels like. All right. Fair enough. Yeah, non-store retailers didn't really talk about that section, but I think it's worth bringing up one of the stronger reports up about 1.1 percent. So that's online. Let's bring in CNBC's Steve Leesman. I mean, Steve, we talked about this earlier today. How does a Fed handle this consumer seemingly unstoppable as rates keep rising? Maybe they're not moving because it's expensive to do so, but they're still buying everything else. Well, I think the word we keep hearing from the Fed is patience.

9:57There's a couple camps at the Fed. There's a smaller camp of folks who say for sure we want to hike. There's another camp of folks who say I could hike, but right now I want to take some time to to look at the data and be patient about it. And there's a third camp that says we were there. We're at the peak rate right now. And I think the data is going to dictate where the Fed ultimately ends up. And by that, I mean, if this strength continues, which is no guarantee, well, I want to offer some support to those who said, you know what, this data is indeed subject to revisions. The trouble with it is we've had several months now of really strong consumer data.

10:39So even if it is revised downward, I doubt all of the strength or the surprising strength is going to be revised away. So what the market has done is essentially take out a hedge on another Fed rate hike, but push that hedge ahead. And so what you see is that not much of a bet on a rate hike in November, a bit more in December. And now the new thing, Courtney, is that January is now in play. You look at that probability, it's about 50%. It's been a bit higher as the day has gone by, 51, 52. And that's a new thing that people had not really thought about the idea that there would be a rate hike in January.

11:16They kind of were thinking that, hey, if they didn't do it this year, they'd be done. The other interesting aspect is that they push ahead when they think cuts will come in. It used to be some folks thought in June or even May, and now it's more July. So I think the effective tool here now, Courtney, to think about is really the Fed holding. And I guess I said this 20 years ago when I was covering Greenspan, but neutral is a gear for the Fed. Staying high at that rate is doing something, as Harker recently said. So I think that's how they react, is to be patient right now. And then if they get the strength of the economy with a fall of inflation, I think they're going to hold.

11:55But if this strength continues and it shows up at inflation, well, then maybe you've got to think about the Fed hiking again. I mean, the inflation is obviously so interesting, but it's something that consumers have been dealing with for so long. We know it exists. Maybe it's getting better in some areas, but really still taking it in stride. It does seem like many of our traders have said here today that jobs are the key for consumers. And as long as they have a job, they're feeling confident enough to spend what they need to spend. Do you think that that's true as well? I mean, does job trump inflation?

12:25I think that's true. And I think I would add to that two other aspects. One is that they underestimated the amount of pandemic savings. We know that because the government buys that higher. And then I think they overestimated how quickly it would be gone and its importance. I don't know about anybody else on the panel there, but if I had a buck for every time somebody told me that the pandemic savings were run out and the consumer was about to crash, I have a few bucks in my pocket right now. That has been a prevailing view, and it's caused me and a lot of people on the street, Courtney, to continuously revise up not just this quarter or the current quarter, but the next quarter.

13:08And that's something that's going to happen, I think, in the next couple days. You look at the weekend Friday reports that come out from the forecasters, and they're going to say, you know what, I don't think the fourth quarter is a 1 % quarter. And I can go back and show you the number of times that over the past year, everybody thought the next quarter was going to be a zero or a 0.5 or a 0.3. But that, in fact, the quarter we're in now that the Atlanta Fed says is a 5.4 percent quarter, we began in our rapid update as a 0.3 percent quarter. You talk about a revision and a surprise and getting to a point I think that Tim Seymour made earlier.

13:48Look at the 10 year note. And when you look at it and you go back to mid-July, it was the July 18th retail sales report for the month of June that fired up this whole rise in rates. So people say it was issuance. Yes, it was. But ultimately, it was also substantially a rethink of the growth path of the U.S. economy and how high and how long the Fed was going to have rates at the current level that caused the rethink and for bond yields to shoot higher. So many surprises in the last couple of months here. And then, of course, today with this number. Steve, thanks so much for joining us here tonight.

14:25We're going to keep talking about this a bit. talk about the Fed's major consumer challenge. Well, you're going to bring in Paul McCauley. He's PIMCO's former chief economist, and he now teaches at Georgetown's McDonough School of Business. Thanks so much for being here with us, Paul. I mean, you heard Steve, so let me just give you an open floor to get started. What do you think about what we heard today about the consumer, and if that changes anything that we're going to hear from the committee at the next meeting, maybe even what we might hear from Powell on Thursday when he speaks? it's hard to agree with disagree with what my friend steve just said the consumer is strong period we can have a discussion about why and wherefore i think jobs and the fact that we have so many uh of households locked into wonderfully low interest rates are the one-two punch for the consumer but from the standpoint of where the fed is i think uh president harker from philadelphia put it really nicely when he said that the Fed can do nothing, but doing nothing is doing something.

15:26And that's not just a riddle. I think it is reality because we've had an inverted yield curve for the last year, which is the marketplace persistently saying, yeah, the Fed may have a little bit more to go, but then they're going to ease quickly on the other side. And I think what we're doing right now is reversing the easing on the other side. So the Fed being on hold resolutely, not hiking, not cutting, effectively is giving us a bare re-sloping of the yield curve, a bare disinversion. Professor Paul, it's Tim Seymour. You were my first economist on Wall Street back in the day. I remember it fondly.

16:10You say in your notes that the economy is showing the contours of a soft landing. And yet again, retail sales today don't show any landing at all. Can you explain the parts of the economy that you are concerned about or at least do seem to be decelerating? I think when you look at the retail sales in isolation, you could say no landing. But when you're looking at the overall mosaic of data, I think we are seeing a landing or a normalization, if you will, post the pandemic. And most importantly, we've seen the supply side of the economy respond, both from the standpoint of bottlenecks, but also the labor force participation rate.

16:55So we're seeing that normalization, which could also be called a soft landing. And also, I think it's important to note that we're seeing disinflation in wages, and that's a key part of the soft landing story. What we're not seeing is a sharp deceleration in job growth. So people may not be getting outside raises, but they're getting jobs and keeping jobs. And I think that is the sturdy portion of our economy, and there's every reason to expect it to continue sturdy. It will decelerate, but nothing precipitous. I think that's one of the things that we in the marketplace really have to get our arms around, is there's not going to be a precipitous slowdown.

17:41It's going to be incremental. Paul, you said earlier that doing nothing is doing something. Steve Leesman talked about the possibility of the rate hikes increasing as we're looking at the January meeting. Do you believe that that will not happen at that point? Are you talking about doing nothing now, later? What's your forecast for the possibility of hikes going down the road? I don't think it's going to happen in January. I do think that the Fed is going to be on hold in a couple weeks' time. And when I refer to doing nothing, we have a 5.38 Fed funds rate. That's the policy rate. Just keeping it there will tend to pull up the entire yield curve.

18:28You saw that in the two-year, obviously, day. It's closing in on five and a quarter, but that's still below five and three-eighths. So I think if the data flow suggests that the Fed quote-unquote should tighten again in January, the marketplace will front-run that in a nanosecond and do the Fed's tightening work for us and would still give us an incredibly flat curve. I put a huge amount of emphasis on the inverted yield curve because it gives the Fed a lot of room to let the market do its work while it just sits there at 5 and 3-8. Thanks. Fascinating stuff. Professor Fall, thank you so much for joining us here tonight.

19:13We're going to go ahead and trade this around the table. Stuart, you were doing a lot of nodding, so I'm going to give you the first comment. Yeah, look, I mean, I agree that the inverted yield curve, I think, is a huge issue right now. A lot of folks, when that curve starts to steepen, think this is a pro-cyclical signal. But the work we've done shows when you're starting from inverted, steepening is actually not what you're hoping to have happen. So I think that's a big issue. And the other thing I wish I would ask him is, how do you define a soft landing? Because soft landing back in January meant a shallow recession.

19:41You know, now soft landing seems to mean something else. But I think, look, the single biggest investment theme this year, and I think it continues, is just positive surprises to consensus growth expectations. And I think, you know, we've gotten distracted by all the event risks. And, you know, frankly, if we would just stay focused on the fact that growth continues to come in way better than expected consistently now for almost nine or ten months, I think people's sentiment towards the markets would have been a lot different. I also think that the bar going into this earnings season is so low.

20:07And as you said, I mean, we people have marked down. There's been EPS revisions. Now, look, we've had an earnings recession. It may be time where I think the analyst community is going to come in and say, you know, this was better than expected. And that's part of it's all about relative expectations going into this earnings season. Anyway, by the way, Professor Paul, he must have the best hair in the professor's lounge. I was thinking about that, too. I mean, it's it's proven. It's stellar. Stellar. Well, coming up, an earnings alert on United Airlines. Shares dropping after reporting results.

20:36The numbers out of that quarter, that's up next. Plus, no mea culpa from one hand, the Bank of America CEO, weighing in on bonds after delivering and earning speed. But one of our traders wasn't loving his answer. More on that when Fast Money Returns are back in two.

20:55We're getting some developing news on the vote for Speaker of the House. Emily Wilkins has the details. Emily, what's going on now? Hey, Gartney. Well, earlier today, Jim Jordan, of course, came short of getting enough votes for the gavel. We said that he expected to have another vote tonight, but he just exited a room where he was for several hours trying to work through the issues with some of the holdouts and said he's not going to have a vote until tomorrow morning. This is just going to give him time to try and talk to some of those members who voted against him, try and figure out if there's a way that he can negotiate or if they can get to some sort of agreement.

21:29There are a lot of concerns right now. Some of them are with Jordan specifically, some of his hardline stances. But there are other concerns just about how this process has played out. There are still a lot of members who are very frustrated that it only took eight members of the Republican caucus to oust Kevin McCarthy. They were upset that Steve Scalise, they feel like he didn't get a fair shake. And now they have a lot of questions with Jordan. But Jim Jordan said that he's not going to be forming a coalition with Democrats, that Republicans are going to power through and get this done. London.

21:59We'll see tomorrow if he's made any progress. Courtney. Emily, thank you very much. Hopefully you can get some rest, too. This sounds like you're in for the long haul here. Well, meantime, an earnings alert on United Airlines, the company beating top and bottom line estimates for the third quarter, but shares dropping on weaker than expected guidance. Phil LeBeau joins us now with more details. Hi, Phil. Hey, Courtney, that guidance is really the issue for United, and we'll learn more tomorrow during the conference call and during our exclusive interview with Scott Kirby on Squawk Box. Let's first go over the Q3 numbers.

22:30Not a huge surprise here that they did better than expected. Remember, the guidance, not the guidance, but the estimates on the street have been moving lower over the last several weeks. They earned 365 versus the street at 335. Revenue, that's record revenue, by the way, at$14.48 billion. Having said that, the cost side of the equation for United, that's the real issue, especially in the fourth quarter. Fuel costs, they were down 11 % in Q3, but in Q4, they're going to be moving higher. That's not a surprise. Everybody in the airline industry is facing that. The other issue for United, when you look at their guidance for the fourth quarter, is the overall cost equation of what they're expecting.