Good morning. The dollar is up 38. Bonds are slightly firmer. Stocks are down 70- 120 bps and accelerating post the Target earnings guidance, Gold is steady up $7. Silver is down 6 cents. Oil is down 50 cents, and NG is up another 15c. Grains are taking a break after yesterday’s limit up move in wheat. Crypto is destroyed again.
On Target
Poor inventory management plus Fed hikes, plus supply chain raggedness equals retailers getting smashed like Target today. The retailer announced it will cancel orders and offer discounts to clear out supply. The stock is trading down $12 and change in pre-market activity as a result.
That reminded us of something from May 14th:
Noticing in stores alternatively empty and full shelves of a thing month to month. They are not getting regular deliveries and so are starting to carry more inventory. This is how they deal with just in time supply shutdowns. The return of stock rooms. How that plays out? No idea- source
This Sunday on a market trip we noted the following:
How does it play out? This is how it plays out. Apparently there’s a phrase called the Bullwhip inventory effect. Zerohedge explains:
The bullwhip effect occurs when a drop in customer demand causes retailers to under stock. In turn, wholesalers respond to a lack of retail orders by understocking themselves. That then causes manufacturers to slow production. Eventually the reverse occurs.
As customer demand comes back, retailers quickly order more goods, often too much, and wholesalers and factories are caught short. Shortages occur, prices increase. Eventually production ramps up at levels that are far beyond equilibrium levels and this cascades down the chain. These violent swings in availability of goods then continue back and forth until an equilibrium is eventually established.
We are now in the first reversal phase when a retailer, in a panic to catch up to demand, overstocks at the moment demand begins to drop. All this reveals in part in our opinion a lack of skill at inventory mgt, and an over dependence on logistics and supply chains.
And that is why Target got slammed this morning taking stocks with it. This news is on top of the RBA rate hike that accelerated risk off behavior overnight.
Also: Leon Tuey on stocks. JPM on commodities.
Data:
Today's economic data slate remains relatively light with the US trade balance due at 8:30 a.m. and consumer credit at 3 p.m. Central banks are quiet although we could hear from ECB's Pierre Wunsch who is due to present the Belgian Financial Stability Review. Treasury auctions include $44 billion of 3-year notes at 1 p.m. JM Smucker Co. is among the companies scheduled to report earnings.
