TQ Morning Briefing
Home Depot beat this morning and left its full year outlook exactly where it was. Inside that outlook sits a customs refund, covering costs the company says it never planned for. Import prices print an hour before the bell.
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Futures are lower, with the Nasdaq leading the way down.
Japan's ten year government bond yield reached its highest in decades overnight. The Nikkei fell sharply.
The thirty year Treasury yield closed at its highest since 2007. The ten year Treasury yield is higher again this morning.
The major indexes all finished lower on Monday. Communication services led the decline.
Nike (NKE) broke to a multi year low. JPMorgan cut it to the firm's lowest rating on a longer turnaround.
Crude rose on Monday after talks with Iran went nowhere. It is easing back this morning.
The dollar is firmer. Gold and bitcoin are both lower.
The volatility index is rising faster than the tape is falling.
Market Implication
Long dated yields sold on both sides of the Pacific overnight. Neither move was answering a growth question. Both were answering a price question. The government's version of that price prints at 8:30.
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The import price index leaves the duty out.
The Bureau of Labor Statistics is blunt about it. Tariffs, it says, "are not included in the prices used to calculate" the index.
So the index measures one thing. What the foreign seller charged before a cent of duty went on top.
That makes it the only clean test of who is paying.
If the seller discounts to keep the order, the exporter is carrying the tariff. If the seller holds firm, the American buyer carries all of it.
Fuel Did Not Do It All
Last month's reading went the wrong way for the buyer. Goods arriving from China cost the most since 2008.
Fuel did much of that work. The blockade has crude far above last summer.
Strip fuel out and the rest still climbed at its fastest pace in four years.
New York state factories said the same thing this month. Their measure of input prices picked up again.
The dollar is no weaker than it was a year ago. This is not a currency story.
Structural Setup
A cost the seller refuses to take has two places left to go. Onto the shelf, where it becomes an inflation print in September. Or into the margin, where it becomes an earnings cut this week. The first big retailer to report found a third way out.
The Guide Did Not Move
Home Depot (HD) beat and held its year unchanged.
Comparable sales rose. Gross margin came in above last year.
The beat came from customers doing smaller jobs. Big ticket work stayed frozen with the housing market.
On the quarter, nobody ate a duty. Operating margin slipped, but that pressure sat in the expense line.
Then read the outlook. It did not move at all.
The company says that outlook now leans on customs refunds. They cover fuel, energy and input costs it had not planned for.
A retailer this size buys forward. The containers on its shelves were priced months ago.
The quarter is a lagged picture. The guide is the live one.
Sector Read
The beat and the unchanged guide point opposite ways. The customs cheque sits in the gap between them. Needing one to hold the year says the input cost is real. A cheque like that only clears once.
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Money Back, Bill Still Running
Customs refunds exist because the Supreme Court struck down the emergency tariffs in February. They cover a year of duties already paid.
Watch what happened to the tariff rate instead.
It fell hard the day the ruling landed. A temporary surcharge put part of it back four days later.
That surcharge came with a statutory clock. It ran out last month. A permanent program landed on sixty trading partners the same day.
The rate is higher now than the morning after the ruling. For the year as a whole it is the heaviest average duty since 1969.
Watch Signal
A duty is a flow, arriving with every container that lands. The court settlement behind it is a stock, and it arrives once. Only one of those shows up again next quarter.
La-Z-Boy (LZB) reports after the close tonight.
Almost all of its upholstery is built in the United States. Management calls that a competitive advantage. It says the home base limits the tariff hit.
So this is the cleanest control in the retail week. If anyone can dodge a duty, it is this company.
It still has a refund claim in with customs. Nobody files one of those without having paid.
Here is the part with a date on it. Management said its price increases only start from the second quarter.
The quarter it reports tonight is the one before that. Cost, and nothing to offset it.
It guided that quarter's operating margin to a range that straddles last year's number.
The Read
Management left itself room in both directions on a quarter it could already mostly see. Land at the top of that range and building at home is real protection. The duty sits on the importers instead. Land at the bottom and the most domestic maker in the category is leaking. Then nobody else is passing this through either.
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Economic Data: Housing Starts and Building Permits for July, 8:30am ET. Import and Export Price Indexes for July, 8:30am ET. NY Fed Business Leaders Survey for August, 8:30am ET. Industrial Production and Capacity Utilization for July, 9:15am ET. NAR Pending Home Sales Index for July, 10:00am ET.
Fed Speakers: None scheduled. Minutes of the July 28-29 meeting land Wednesday, 2:00pm ET.
Earnings: Home Depot (HD), Baidu (BIDU), Amer Sports (AS) before open | Toll Brothers (TOL), Keysight Technologies (KEYS), La-Z-Boy (LZB), Jack Henry & Associates (JKHY) after close. Toll Brothers, La-Z-Boy and Jack Henry all publish results tonight and hold their calls Wednesday morning.
Overnight: Nikkei 225 -2.54%, Shanghai Composite +0.19%, FTSE +0.15%, DAX -0.28%
The duty on an imported sofa was meant to rise at the start of this year.
It was pushed back twelve months instead.
That deferral runs out on the first of January.
Between now and then the market settles an argument.
If retailers move this year's duty into the price and keep their margin, the increase is affordable. The shopper pays it.
If margins crack first, the increase gets deferred again. A sectoral tariff nobody can collect is only a headline.
Tonight a furniture maker with American plants reports the quarter it ate the cost alone. That is the opening bid.