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American shoppers continue to defy gravity against the backdrop of persistently elevated inflation. Retail sales surged by 1.3% in October. That’s the biggest monthly gain since February and better than the 1% economists had expected.

But a look under the hood tells a different story. Both Walmart (WMT) and Target (TGT) noted a softening in demand for discretionary items — the stuff you don’t need like electronics versus essentials like groceries. Home Depot (HD), meanwhile, reported fewer customer transactions in the third quarter. The comments point to a slowdown ahead.

What’s happening: Wednesday’s headline retail sales numbers, reported by the US Census Bureau, came in strong, but the momentum is unlikely to continue.

Strong household finances at the beginning of the year helped stave off the impact of elevated inflation, but those conditions are changing. Credit card debt is growing, and savings are dwindling. The New York Federal Reserve reported Tuesday that consumer credit card balances grew by 15% year-over-year in the third quarter — the highest in more than 20 years.

The retail numbers also reveal a shift in spending. Those non-essential, discretionary sectors like apparel, home, and electronics are slowing.

The big boost to the headline sales number came from essential items like food and gas. Sales rose at grocery stores by 6.8%, but that increase was largely due to inflation, said Neil Saunders, managing director of GlobalData. Food prices increased 10.9% in October from a year ago.

To mitigate price increases, shoppers are also increasingly buying store-brand items and finding cheaper places to shop, added Saunders.

These cracks in retail are starting to show just as the sector enters its most critical sales period: The holiday shopping season. The National Retail Federation, a trade group for the retail industry, estimates that holiday sales will increase between 6% and 8% this year, slower growth than a year ago.

A tale of two stores: Walmart and Target reported that their private-brand sales grew last quarter and that grocery sales outperformed those of discretionary items. But overall, their earnings show very different pictures.

Target’s profit plunged 52% in the third quarter, and the company lowered its outlook for the rest of the year. In a call on Wednesday, CEO Brian Cornell said that in recent weeks “sales and profit trends softened meaningfully, with guests’ shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty.”

Walmart, meanwhile, beat Wall Street estimates and reported that sales rose by nearly 9% last quarter. The company also raised its full-year outlook.

So what explains the discrepancy?

“Everything is kind of muddy right now,” said Jim Baird, Plante Moran Financial Advisors CIO. But he said there’s a clear distinction in how retailers are handling the build up of inventory caused by global supply chain issues.

Analysts largely say that Walmart has done a good job at clearing through the backlog of merchandise stuck at ports, while Target has had more difficulty getting rid of excess, now out-of-season goods.

Walmart has also benefited from new, higher-income shoppers looking to trade down to save some cash.

The bottom line: This holiday season will likely be a mixed bag with some winners and losers in the retail sector, said Saunders. But one thing that’s clear is that “there is definitely softening underway.”

Britain goes back to austerity

It’s been less than two months since former British finance minister Kwasi Kwarteng revealed his plans for large tax cuts and increased spending amid historically high inflation. It didn’t go too well: Markets went berserk, there was a bond meltdown, and the country’s prime minister ultimately lost her job.

The new government is not looking for a repeat performance, reports my colleague Julia Horowitz. Chancellor Jeremy Hunt will unveil a budget that will aim to restore confidence in the United Kingdom’s ability to manage its public finances on Thursday by doing just the opposite of his predecessor.

Media reports indicate that the government is looking to come up with between £50 billion ($59 billion) and £60 billion ($70 billion) through a mix of tax increases and spending cuts, many of which may not take effect until after the next election in 2024.

But regaining market confidence may be easier said than done.

The country is staring down the barrel of a grueling recession, and investors remain on edge as interest rates rise. That requires Hunt, who has acknowledged that Britain faces “extremely difficult” decisions, to pull off a delicate balancing act.

New cuts could make matters worse by shaving off some of the country’s GDP and putting excess pressure on already strained public services. Tax increases could also chip away at consumer confidence — already near a record low.

Still, Hunt is steadfast in his plan. “We do have to do some tax rises, do some spending cuts, if we’re going to show we’re a country that pays our way,” he told Sky News on Sunday.

More layoffs for Big Tech

Amazon (AMZN) confirmed on Wednesday that layoffs had begun at the company, two days after multiple outlets reported the e-commerce giant planned to cut around 10,000 employees.

“After a deep set of reviews, we recently decided to consolidate some teams and programs. One of the consequences of these decisions is that some roles will no longer be required,” wrote Dave Limp, senior vice president of devices & services at Amazon in a publicly-shared memo. “We notified impacted employees yesterday, and will continue to work closely with each individual to provide support, including assisting in finding new roles.”

He did not specify how many employees have been cut.

The big picture: Amazon is adding to the growing trend of layoffs in Big Tech.

Facebook-parent Meta (META) recently announced 11,000 job cuts, the largest in the company’s history. Twitter also announced widespread job cuts after Elon Musk bought the company for $44 billion. Lyft (LYFT) has laid off 13% of its workers. And Stripe, Zillow (Z) and GoFundMe have also announced layoffs this quarter.

Apple (AAPL), meanwhile, has announced a hiring freeze and Google (GOOG) has said it will slow its pace of hiring.