Cracks Are Forming In Consumer Spending As The U.S. Inches Closer To Recession

Plus, GM and the UAW union have finally reached an agreement, China just issued a new warning to U.S. lawmakers, and Bank of America beat estimates.

Stocks were down Wednesday morning as the Dow dropped 31 points, or -0.1%. The S&P 500 also fell -0.1%, while the Nasdaq pulled back -0.3%.

Retail sales unexpectedly dropped in September, the first decline in seven months. The Commerce Department said this morning that retail sales fell 0.3% last month as consumers slashed spending on building materials, automobiles, and online purchases, giving some fuel to the fears that cracks are forming in the consumer spending that has propped economic growth up in the past few months. Combined with the slowdown in American manufacturing and weakening business investment, as well as the ongoing trade war with China, weaker consumer spending could increase the likelihood of a recession. 

One bright spot in the aftermath of this morning’s disappointing retail sales report is that it potentially bolsters the case for a third straight interest rate cut by the Federal Reserve when it meets later this month. The implied odds for a quarter-point cut are now at 88%, up from 74% yesterday. Even still, Chicago Fed President Charles Evans said this morning that after two rate cuts already this year, “I think policy is probably is in a good place right now.” Evans did acknowledge, however, “there is some risk that the economy will have more difficulty navigating all the uncertainties out there or that unexpected downside shocks might hit. So there is an argument for more accommodation now to provide some further risk-management buffer against these potential events.” The Fed meets again on October 29 – 30.

General Motors and union leaders have come to a tentative deal on a new labor contract to end the United Auto Workers strike. While details of the proposed agreement have not yet been released, the 48,000 UAW workers with GM are expected to get raises and bonuses, and the company is also likely to invest at least $7 billion in its manufacturing operations as well as add thousands of new hourly jobs for union workers over the next four years. The deal still needs approval from local union leaders and is likely at least two weeks away from final approval; once approved by leaders, union members will vote on the deal. Once the new contract with GM is finalized and ratified by members, it will be used as a template by the union in upcoming negotiations with Ford and Fiat Chrysler

President Trump said this morning that the “phase one” trade deal with China probably won’t be signed until he meets with Chinese President Xi Jinping at the APEC summit in Chile next month. “China has started buying already from the farmers,” Trump added. But The Wall Street Journal reported this morning that the deal is already looking hazy, especially when it comes to China’s promise to up its purchases of agricultural products. China has agreed to purchase $40 to $50 billion worth of U.S. agricultural products, which is well above the historical average China has spent on such purchases, while Chinese negotiators have said that the country will only buy U.S. agricultural products based on demand and market prices. What’s complicating the trade deal even more is China’s threat of unspecified “strong consequences” if the U.S. Congress enacts legislation supporting Hong Kong protesters. China’s foreign ministry issued the warning today after the U.S. House passed measures backing the pro-democracy movement that has gripped Hong Kong for the past four months. The legislation goes to the Senate next, where it has strong bipartisan support, before heading to Trump’s desk for signature. Chinese Ministry of Foreign Affairs spokesman Geng Shuang warned U.S. lawmakers to cease meddling in China’s internal affairs “before falling off the edge of the cliff.”

Shares of Bank of America are up nearly 2% this morning after the firm beat estimates for Q3 profit and revenue. The bank said this morning that net income excluding an impairment charge jumped 4% to $7.5 billion, or $0.75 per share. Bank of America’s global banking business posted a rise of 8% to $5.2 billion on higher investment banking fees with a 27% increase in advisory fees to $1.5 billion. “In a moderately growing economy, we focused on driving those things that are controllable,” said CEO Brian Moynihan. “We made continued strong investments in our capabilities to serve customers, more relationship management teammates, more and refurbished branches and offices, and more digital capabilities, all while core expenses are flat.” All eyes are now on Netflix, which will report earnings later this afternoon for its last calm quarter before the streaming wars officially begin next month with the introduction of Apple TV+ and Disney+.

Stocks We’re Watching

Relmada Therapeutics (NASDAQ: RLMD): Shares of this clinical-stage biotech jumped more than 221% yesterday after it reported positive results from its mid-stage trial of a new treatment for depression. Relmada said its Phase 2 trail of REL-1017 showed statistically significant improvement for patients with treatment resistant depression. “We are very pleased to announce these highly compelling results,” said Relmada CMO and R&D chief Dr. Ottavio Vitolo. “This is the first clinical evidence that REL-1017 exerts a rapid and robust antidepressant effect, which continues even after treatment discontinuation. These findings replicate what was previously observed in animal studies and support a potentially neurotrophic effect of REL-1017.”

Galapagos NV (NASDAQ: GLPG): Shares of this biotech are up 7% over the last week after it and partner Gilead Sciences reported 52-week efficacy and safety results of their FINCH 1 and 3 studies on the oral, selective JAK1 inhibitor, filgotinib, for the treatment of moderately-to-severely active rheumatoid arthritis (RA) and other inflammatory diseases. As part of the deal with Gilead, Galapagos will receive a $3.95 billion upfront payment and a $1.1 billion equity investment, and could earn up to $1.27 billion in milestones for filgotinib. Filgotinib is a potential blockbuster drug with 10+ indications in an inflammation market that’s expected to be worth $65 billion by 2027.


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