RPT-Wall St Week Ahead-Investors look for consumer pressure ahead of next China tariffsAugust 11, 2019
Aug 9 (Reuters) – As President Donald Trump prepares to slap new tariffs on Chinese imports, investors are bracing for signs of pressure on U.S. consumers as top retailers begin reporting quarterly results next week and key consumer sentiment and retail sales data is released.
Investors and analysts are anxious about the impact of Trump’s planned 10% tariff on the remaining $300 billion in Chinese imports, which will largely affect consumer goods, unlike the previous round that fell heavily on industrial and business products. That could be a double-whammy for the U.S. economy, which is about 70 percent driven by consumers, and retailers.
Mona Mahajan, U.S. investment strategist at Allianz Global Investors in New York, is among analysts focusing on the fallout from the tariffs, noting that the planned new round will “disproportionately” impact consumer goods.
“We’ll be watching the data particularly around retail sales and consumer confidence,” Mahajan said. “We’ll continue to monitor the softening in manufacturing and inflation as well, but more important for the U.S. economic picture is the consumer right now.”
July retail sales data is due out on Thursday. Excluding autos, sales are expected to have grown 0.3% compared with 0.4% in June, according to a Reuters poll. On Friday, The University of Michigan’s preliminary August reading of consumer sentiment is expected to show a slip to 97.7 from 98.4 in July.
The S&P Retail index fell a total of 5.3% in the first three trading sessions following Trump’s Aug. 1 tariff announcement. As of Thursday’s market close, the index was down 1.6% for the month so far.
UBS analyst Jay Sole said fears that the tariffs could eventually increase to 25% were also an overhang for stocks. Morgan Stanley has estimated that 25% tariffs would lead to a global recession.
Retailers will have the dilemma of deciding whether to pass the tariffs on to consumers in the form of higher prices or absorb the higher costs, which would reduce profit margins.
“If you’re in a competitive environment you’re going to take some action to keep your customers,” said Charles East, an equity analyst covering consumer companies at SunTrust Private Wealth Management, who said that department stores are particularly vulnerable.
“I really don’t think they can push prices up because their sales are already weak,” East said. “The margins are under pressure. Perhaps they can accelerate cost-cutting.”
With two thirds of U.S. footwear coming from China, for example, UBS’s Sole will look for comments in earnings calls and statements on how retailers and footwear companies plan to handle the tariffs.
“It’s a big deal. Our assumption is that there will be an attempt to raise prices on the goods,” Sole said.
“We think consumers are going to resist those price increases,” he added, citing a UBS survey of 7,660 consumers in July that showed 77% of respondents were worried the China trade war…