New Zealand’s central bank cut interest rates to a three-year low and signaled further easing, saying the economy has stalled https://t.co/ke0WMx1Ogt ...

Market Trends & Expectations - Traders are betting on the Federal Reserve cutting interest rates by more than 0.25% next month [1]

Core Viewpoint - The second-quarter earnings season is concluding, with over 90% of S&P 500 companies reporting results, and the retail sector is prominently featured this week [1] Company Performance: Home Depot - Home Depot reported its second consecutive earnings miss, with adjusted EPS of $4.68 compared to expectations of $4.71, reflecting a 0.64% miss, and total revenues of $45.28 billion versus $45.51 billion, a 0.5% miss [6] - The company experienced a 0.86% increase in net income year-over-year and a 4.9% increase in revenues compared to the second quarter of 2024 [6] - Comparable sales increased by 1.0%, with U.S. comparable sales rising by 1.4%, although foreign exchange rates negatively impacted total comparable sales by approximately 40 basis points [7] - Home Depot reaffirmed its guidance for total sales growth of approximately 2.8% for the fiscal year, with comparable sales growth of 1.0% and an expected adjusted EPS decline of 2% to $15.24 [9] - The company is facing challenges from elevated interest rates and a slowdown in the home improvement sector, which has seen reduced demand due to high mortgage rates and rising home prices [4][10] Industry Context: Home Improvement Sector - The home improvement sector is currently ranked in the bottom 16% of approximately 250 Zacks Ranked Industries, with most stocks considered overvalued and expected to experience below-average earnings growth [3] - The sector has been adversely affected by a broader operating environment characterized by high interest rates and weak discretionary spending, leading to a slowdown in large-scale home remodeling projects [4] - Despite the challenges, the aging housing stock and rising home equity levels are expected to support long-term demand in the home improvement market [18] Upcoming Performance: Lowe's - Lowe's is expected to report second-quarter earnings of $4.24 per share, a 3.41% improvement year-over-year, with revenues anticipated to climb 1.47% to $23.93 billion [12][15] - The company has not missed earnings estimates since 2019 and has a trailing four-quarter average earnings surprise of 3.22% [13] - Lowe's has expanded its reach to larger professional customers through the acquisition of Artisan Design Group, which is expected to enhance its capabilities in new home construction and large-scale renovation projects [16]

Interest Rate Policy - Roth Capital Partners' chief economist believes a 25 basis point rate cut in September is fully priced in [1] - A year ago, there was a stronger case for rate cuts due to rising unemployment and lower inflation expectations (50 basis points lower at the 5-year horizon) [2] - The Fed needs to be wary of fueling expectations for over 100 basis points of cuts in the next year [3] Economic Outlook - Q3 macro data appears okay, with consumer spending and real GDP growth both tracking above 2% [4] - Q3 inflation, measured by the GDP price deflator, is running just below 3%, resulting in approximately 5% nominal growth [5] - The Fed Chair is expected to be tight-lipped and emphasize data dependency [5]

Fed Policy & Market Commentary - Scott Besson's claim that the Fed funds rate should be 150 basis points (1.5%) lower is considered inaccurate and potentially misleading [2][4] - The industry expresses concern over suggestions of a "rogue" Fed, emphasizing the importance of calm and reasoned communication [3] - Upcoming Jackson Hole meeting may reveal a potential shift away from average index inflation targeting, a move considered ill-timed in retrospect [5] - Core inflation is above 3% and rising, requiring strong justification for policy adjustments [5] Central Bank Dissent & Rate Expectations - The Bank of England's visible dissent and split votes on interest rates have surprisingly led to smoother rate expectations compared to the US [8] - Open and honest arguments among economists, as seen in the Bank of England, can be beneficial in navigating rate expectations [9] Potential Policy Shifts - The administration might focus on recent Fed mistakes, potentially influencing future policy decisions [5] - There is a discussion on whether the Fed should adopt a more argumentative approach, similar to the Bank of England, to foster transparency and debate [6]

Economic Outlook - The analysis considers scenarios reminiscent of the 1990s with low inflationary growth or President Trump's first term [1] - Higher interest rates are creating distributional issues, especially in housing and for lower-income households with high credit card debt [1] - A significant capex boom is underway, driven by AI and tax policies [1] Housing Market - Home building is currently struggling [2] - Constraining home building could lead to inflation in the future [2] - A rate cut could stimulate a boom or pickup in home building, potentially lowering prices in the future [3]

Consumer & Market Trends - Home Depot's primary consumers are homeowners, typically dual-income households with higher earnings, experiencing strong employment and wage growth [1] - Consumers are still spending, but a shift is observed towards smaller ticket categories, while larger ticket discretionary categories are experiencing weakness [2] - High interest rates are causing consumers to delay larger, finance-dependent projects like kitchen and bath renovations [3] Impact of Interest Rates - The industry is trying to determine if project activity is delayed or permanently derailed due to high rates [4] - Anticipation of Federal Reserve rate cuts is expected to unlock pent-up demand for larger projects [5] - Lower rates and increased housing market activity are projected to boost demand for big-ticket projects [6] Home Depot's Strategy - Home Depot is positioning itself to capitalize on the re-emergence of demand for large projects, particularly through professional contractors [6]

Market Overview & Trends - Home Depot's sales momentum is lacking due to less accommodative interest rates, impacting the home improvement channel [2][3] - Summer-like weather helped Home Depot's sales growth slightly during the fiscal quarter [4] - Delays in large renovations are observed, with expectations of lower rates as a trigger for project commencement [9] - A 5% handle on the 30-year fixed mortgage rate could unlock significant remodeling demand [11] Company Performance & Strategy - Home Depot is managing wealth and is a well-run company in a solid sector, but lacks sales momentum [2] - Home Depot benefits from pent-up demand in the US housing market, which is expected to resurge as rates move lower [7] - Home Depot is making better and bigger moves in the complex pro business [15] Investment Recommendation & Valuation - Oppenheimer views Lowe's as a better investment play due to more operational slack and a wider valuation gap compared to Home Depot [13][15] - Lowe's operations are now very close to Home Depot's, but there's still a little more slack there [14] - Despite improvements at Lowe's, the valuation gap between Lowe's and Home Depot has remained very wide, making Lowe's cheap [15] Interest Rate Impact - Lower mortgage rates are expected to re-accelerate sales at Home Depot [7] - A move towards a 5% handle on the 30-year fixed mortgage rate is anticipated to unlock remodeling demand [11] - Lower HELOC (Home Equity Line of Credit) rates, influenced by Fed moves, could fuel remodeling demand by allowing homeowners to tap into historic equity [12]

⚡️ UPDATE: Polymarket users predict a 71% chance the Fed will cut rates by 25 bps in September. https://t.co/3nrBXc113Q ...

🚨 LATEST: Goldman Sachs expects the Fed to cut interest rates three times before year-end, as US job market weakens. https://t.co/uyYLk2rCej ...