The Market Today
Retail Sales Better in June but Faster Data Show Slowing Rate of Improvement
by Craig Dismuke, Dudley Carter
Monitoring the Headlines: Adding to optimism created by the Moderna vaccine review, a vaccine candidate from Oxford also reportedly created a notable antibody response. The daily pace of infection slowed in Florida and Arizona but picked up in Texas and California. California added 11,126 new cases, the second largest daily jump, while Texas set a new record at 10,791. The push for broader compliance with global recommendations for face coverings continued to ramp up. Alabama’s governor issued an order requiring masks in public and Ohio’s governor asked all resident to wear face coverings. Walmart, one of the world’s largest retailers, said customers will be required to wear masks in their stores starting July 20. Kroger implemented a mask requirement for its stores starting July 22. Ireland and the U.K. are reportedly considering face covering requirements. Senate Majority Leader McConnell said he had spoken with Treasury Secretary Mnuchin about the next wave of stimulus and again said he expects his draft plan will be ready sometime next week.
Initial Jobless Claims Show Slower Pace of Improvement: Initial jobless claims for the week ending July 11 fell fractionally from 1.31 to 1.30 million, disappointing expectations for a larger decline. Reported separately from the standard state UI programs, the number of initial claims for Pandemic Unemployment Assistance fell from 1,046k to 929k. Continuing claims for the week ending July 4 were a bit more positive falling from 17.8 (revised down from 18.1 million) to 17.3 million. There is currently a reclassification of claims from the standard state UC programs to PUA-qualified claimants adding noise to the claims data. There is also another week-long lag for the PUA program data. For the week ending June 27, the number of people on the PUA program rose from 13.9 to 14.3 million. Combined with the UC claimants, 32.0 million persons were receiving some form of unemployment for the reference week. This does not square with other labor market indicators, which point to somewhere between 15 and 20 million unemployed. Nonetheless, the unemployment programs, collectively, paint a picture of fewer new claims but a slowing pace of people returning to work (see Chart of the Day).
Some Segments of Retail Sales Recover Pandemic Losses: The June retail sales report showed a little better improvement in activity than expected. Headline sales rose 6.5% after recovering a revised-higher 18.2% in May. Headline sales are now down just 1% from their January peak. Core sales improved 5.6% in June and are now 1.8% above their pre-virus peak in March. There remain segments of retail that are outperforming others. Motor vehicle and parts (+4.4%), online sales (+14.4%), building materials (+8.2%), and sporting goods sales (+23.0%) are all above their pre-virus levels. Meanwhile, clothing (-24.5%), health/personal care (-10.2%), furniture (-5.6%), electronics and appliances (-13.6%), and restaurant sales (-27.7%) all remain below their pre-virus levels.
Philadelphia Fed’s Business Index Cooled Less than Expected after Record Surge: The Philadelphia Fed’s Business Outlook index slipped 3.4 points to 24.1 after a 70.6-point spike last month, holding above expectations for a dip to 20.0. The details were consistent with those in the Empire Manufacturing survey released earlier this week, with one notable caveat. Most current indicators strengthened during the month while expectations for six months from now moved down from high levels; aggregate expectations for early in 2021 fell from 66.3, a high back to 1992, to a less impressive 36. In contrast to the Empire survey, however, both current and future indications for employment improved.
Homebuilder Confidence, Fedspeak, and NFLX Earnings: At 9:00 a.m. CT, the July report on homebuilder confidence is expected to show further improvement from an already-solid level. There are also three Fed officials speaking today: New York’s Williams (10:10 a.m.), Atlanta’s Bostic (11:00 a.m. and 1:00 p.m.), and Chicago’s Evans (12:30 p.m.). Netflix will be reporting 2Q earnings at the market close.
Equities Rose on Optimism: U.S. equities slowly gave back some of their strong early gains and Treasury yields erased an early rise as caution kept a lid on risk appetite despite the positive reports about Moderna’s vaccine candidate. After jumping as much as 1.3% by mid-morning, the S&P 500 ended 0.9% higher with 10 of its 11 underlying sectors closing up on the day. Cyclical stocks led the way following Tuesday’s news about Moderna’s vaccine candidate producing antibodies in all 45 patients in an early trial. Industrial companies were the top performers as airline stocks surged. Energy companies were close behind as oil prices rose and financials finished in third after Goldman beat expectations. Further fueling the positive attitude on Wall Street, industrial production snapped back in June and the Fed’s Beige Book showed the economy continued its slow recovery into early July.
Treasury Yields Remained Locked in Place: Those positive forces – progress on the medical front and signs of economic recovery – have helped keep the stock market propped up even as cases continue to rise around the country. Adding further support to buoyant equity markets has been significant fiscal stimulus and a pledge from the Fed to keep rates low for an extended period of time to aid the recovery. That commitment has helped keep Treasury yields locked in a tight, low range. That continued Wednesday with the 2-year yield inching down 0.2 bps to 0.16% while the 10-year yield added just 0.7 bps to 0.63%
Global Stocks Drop Together Despite Stronger-than-Expected China Recovery: World equities are exclusively lower on Thursday ahead of a big morning for U.S. economic reports and following the release of mixed data in China. China’s CSI 300 led losses across Asia, tumbling 4.8% in its third consecutive decline and largest daily drop since February 3. The country’s economy recovered 11.5% QoQ in the second quarter and 3.2% YoY, exceeding respective expectations of 9.6% and 2.4%. However, data showed the momentum remained concentrated in the industrial sector in June as retail sales fell unexpectedly by 1.8% from a year ago. Stocks moved lower in Europe to drag the Stoxx 600 down 0.6%. As expected, the ECB opted to leave its monetary policy stance, including its emergency pandemic programs, unchanged on Thursday.
Treasury Yields Moved Lower Before Key U.S. Data: Before the key updates on jobless claims and retail sales, Dow and S&P 500 futures were both down 0.6% and the Treasury curve had inched lower, with the 10-year yield down 1.5 bps. Shares of Bank of America were lower after the company’s earnings report. Profits slid by a smaller-than-expected 52% last quarter, a comparatively consistent result with peer banks that announced earlier this week. It’s $5.1 billion loan provision, however, was smaller than both expectations and peer bank activity and appeared to be a popular topic to question in the conference call. After the mixed data, stock futures were 0.7% lower and the 10-year yield had edged down by 2.1 bps on the day.
Industrial and Manufacturing Output Jump Most in Decades But Still Much Work to Be Done: The Fed’s industrial production report became the latest economic release to show further recovery in June prior to new infections leading some states to pause or pare back their reopening plans. Overall industrial output rose 5.4% last month after a 1.4% gain in May, beating expectations for a 4.3% improvement with the strongest month since 1959. Consistent with other data series, however, output remains severely depressed from pre-pandemic levels. After sharp contractions of 4.4% and 12.7% in March and April, monthly output remains nearly 11% lower than in February. Manufacturing output surged a larger-than-expected 7.2%, the strongest gain since 1946, as auto production led strong gains across every category. Similar to overall industrial output, two solid months of recovery have pulled manufacturing output up 11% from April’s lockdown low. However, the 11% gap that remains with February’s pre-pandemic pace shows much work still lies ahead.
Fed’s Beige Book Confirmed Slow Recovery and Uncertain Outlook: There were no surprises in the Fed’s July Beige Book. Activity continued to recover across the country in early July but remained well below stronger levels from before the pandemic and the outlook was contingent on the highly uncertain path of the virus. Sales of autos, food, and home improvement supplies led wider recovery in consumer purchases and manufacturing activity continued its slight recovery across most Districts. Home sales gained moderately while commercial real estate remained subdued. Residential mortgages and scattered PPP loans were the only bright spots for an inactive loan market. Hiring continued to pick-up but there continued to be layoffs and some workers were hesitant to return to work – health concerns and the high level of unemployment insurance available were listed among the reasons. Concerns about keeping workers on the payrolls after PPP funds were used up was also noted, with the decision said to be contingent on consumer demand. Looking ahead, “Outlooks remained highly uncertain, as contacts grappled with how long the COVID-19 pandemic would continue and the magnitude of its economic implications.”