S&P/ASX 200 Index (ASX: XJO) shares often react to external events such as higher interest rates or the latest employment numbers. Recent sales data could also be influential on share market returns.
The Reserve Bank of Australia (RBA) has the unpopular job of trying to bring strong inflation under control, with higher interest rates being a key weapon.
For retailers, it's a tough situation. If retail figures are weak then that's bad for earnings and a headwind for the share price. If retail sales are strong then it may well mean that the RBA has to keep increasing the interest rate to try to lower household spending, and this could hurt the valuation. Either way, it may not be good news for investors.
Let's have a look at what the latest figures revealed.
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Retail numbers
According to the Australian Bureau of Statistics (ABS) reporting, May 2023 showed retail growth of 0.7% month over month, and a 4.2% increase compared to May 2022.
Despite all of the interest rate rises, the industry saw a strong rise in sales.
According to reporting by the Australian Financial Review, ABS head of retail statistics Ben Dorber said the bigger-than-expected rise in consumer spending last month was because of "abnormally large levels of promotional activity, including earlier than usual end-of-financial-year sales events and Mother's Day sales."
If retail sales were stronger than the RBA was hoping, then it could suggest that further economic tightening of conditions is needed, which could hurt ASX 200 share valuations.
However, the AFR referred to economists suggesting that the strong retail result was an "anomaly" and "didn't signal renewed strength in consumer spending."
The newspaper also reported on commentary from the largest ASX bank shares that internal data shows "consumer spending falling far quicker than official figures."
Westpac Bank Corp (ASX: WBC) reportedly said that customers had "put away their wallets" last month after the latest RBA interest rate increase.
What does this mean for ASX retail shares?
Taken by itself, I think the monthly numbers were mixed for what it means for ASX 200 (retail) shares. A sales boost is a good thing for the retailers, but that recovery seems to be short-lived, according to Westpac.
The RBA may want to make sure that retail sales don't recover, which could mean that another interest rate rise is more likely this month and/or next month.
Share prices can move differently from what the reported numbers suggest. But, I think that it's a longer-term negative. A month is only a twelfth of the year, the rest of the annual result is influenced by the other 11 months. Plus, fears of another retail slowdown could mean more downgrades for retailers.
I'm keeping my eyes on Bunnings and Kmart owner Wesfarmers Ltd (ASX: WES) and electronics retailer JB Hi-Fi Limited (ASX: JBH). It will be interesting to read commentary about their outlooks from here.
For banks, higher interest rates could be a negative if it means borrowers are more likely to go into arrears.
