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The start of summer — What you need to know in markets this week

Myles Udland
Markets Reporter

After a very busy week that saw the Federal Reserve raise interest rates for the third time since December, Uber issue a long-awaited report about its internal culture, and Amazon (AMZN) announce a blockbuster $13.7 billion deal to acquire Whole Foods (WFM), the calendar in the week ahead should be more tame.

On the economic front, highlights are likely to include reports on existing and new home sales, slated for Wednesday and Friday, respectively. Elsewhere we’ll also get a number of speeches from prominent Fed officials, though we are not scheduled to hear from Fed Chair Janet Yellen.

And on Wednesday, summer will officially begin in the northern hemisphere, with the solstice marking the longest day of the year.

On Friday, Minneapolis Fed president Neel Kashkari, the lone dissenter in the Fed’s vote to raise interest rates on Wednesday, published a post on Medium explaining his decision to vote against a rate hike.

Kashkari wrote that, “For me, deciding whether to raise rates or hold steady came down to a tension between faith and data.”

On the faith side, Kashkari said his view that tight labor markets would push up the cost of labor, and thus the cost of goods, remains intact. The data, however, do not currently support a view that this is set to happen imminently.

“When I’m torn between faith and data, I look at decisions from a risk management perspective,” Kashkari added. And right now, keeping rates low is the less risky option, in this view.

In its latest set of economic projections published this week, the Fed said it expected to raise rates once more this year.

Economic calendar

  • Monday: No major economic data set for release.
  • Tuesday: No major economic data set for release. Fed vice chair Stanley Fischer speaks in Amsterdam.
  • Wednesday: Existing home sales, May (-0.4% expected; -2.3% previously); First day of summer, northern hemisphere
  • Thursday: Initial jobless claims (240,000 expected; 237,000 previously); FHFA home price index, April (+0.5% expected; +0.6% previously); Leading index of economic indicators, May (+0.4% expected; +0.3% previously); Kansas City Fed manufacturing index, June (10 expected; 8 previously)
  • Friday: Markit flash manufacturing PMI, June (52.9 expected; 52.7 previously); Markit flash service PMI, June (53.5 expected; 53.6 previously); New home sales, May (+3.8% expected; -11.4% previously)

Amazon, Amazon, Amazon

In case you missed it, Amazon announced it would buy Whole Foods for $13.7 billion.

The deal, which followed a report in Bloomberg back in April which said Amazon had looked at the organic grocery chain last year, has implications for a number of industries.

For one, shares of basically any retailer that sells food were down sharply on Friday. As malls and department stores and bookstores have found out, when Amazon comes into your industry, things get worse.

Pharmacy stocks were also lower as investors saw Amazon’s aggressive play into the grocery space as a warning sign to the sector — which has yet to really feel the disruption of online retailing — that Amazon may yet look to become a player in the space.

Meanwhile, Amazon’s chief rival — Walmart (WMT) — announced a deal to acquire online menswear retailer Bonobos for $310 million. Walmart, which gets half of its revenue from grocery sales, saw shares fall almost 5% to end the week.

But as Gordon Haskett analyst Chuck Grom said in a note on Friday following news Amazon would buy Whole Foods, “The ramifications for all of retail are seismic — not just retailers that sell grocery, but for everyone.”

For one thing, by buying Whole Foods, Amazon is saying that physical retail is not dead. Whole Foods operates north of 450 stores, according to its latest annual report filed with the SEC. And so while Amazon just became the owner of a major grocery chain that has struggled with growing sales, it also bought a network of 450-odd warehouses, located in many upscale zipcodes across America.

We’ve seen Amazon begin to open physical retail locations, most recently in New York City, making clear that the company thinks in-person shopping is not dead, despite the abandoned retail outlets the company has left in its wake. Its acquisition of Whole Foods is a further affirmation of this view.

Earlier this month, it was reported that Amazon would bring the cost of its $99-per-year Prime membership down for folks on government assistance programs. But the core of Amazon’s business is around attracting consumers who will pay for the Prime membership, as research has shown Prime members buy way more stuff each year on Amazon that non-Prime members.

And, by extension, it is fair to say that Amazon’s core customer to date has been a middle to upper-middle class U.S. consumer. And these are the folks who are also shopping at Whole Foods.

Amazon CEO Jeff Bezos has said that he wants to make it “irresponsible” for people not to be a Prime member.

Amazon CEO Jeff Bezos

Prime began by offering free two-day shipping. Then Amazon bolstered this membership by adding music, and movies, and television shows. In some cities, Prime members can get goods delivered within hours.

Buying Whole Foods, then, brings two new potential “flywheels” — Amazon’s preferred imagery for how it attracts and retains its customer base — into Amazon’s customer graph.

By owning a grocery, Amazon is now directly selling perhaps the only home good it had almost no part in getting to its customers — fresh food. Whether this food is delivered to picked up in store, Amazon will now know more about what its customers are buying, when they are buying it, where they are buying it, and how often.

But the second flywheel is that Amazon can begin, from the inside out, to reshape what a grocery store. Right now, a large grocery store is a mix of fresh food, packaged food, frozen food, household essentials, and so on.

In the future, though, Amazon might find a way to get its customer base to buy the essentials online, in bulk, and use stores as showrooms not just for books and the Amazon Echo, but for recipes, food groups, and the latest kitchen fads. Instead of making the grocery store a place people try to power through to get home quickly, Amazon may try to make it a showroom for some but not all foods, knowing that what you need has already been delivered to your door.

All this, of course, sounds at once charming and at the same time a bit dystopian.

Which brings us to the final possibility for this acquisition — it could fail. Spectacularly.

Remember that less than four years ago Whole Foods was a $60 stock. On Friday, it was bought for $42 per share. There are clear problems with Whole Foods’ core business — namely, people don’t shop there as much — and Amazon’s success in some retail arenas will not necessarily translate to the grocery space.

Additionally, Amazon has failed with new projects and given up before.

Back in 2014, Amazon launched the Fire Phone, a new smartphone that would compete with iPhone and other top android devices. It flopped, and the company killed it a year later.

“Most decisions should probably be made with somewhere around 70% of the information you wish you had,” Bezos wrote in this year’s letter to Amazon shareholders.

“If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.”

In other words, act boldly and decisively.

Acquiring a grocery store chain for almost $14 billion is a bold and decisive move. So don’t be surprised if Amazon reverses course faster than you think.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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