The Market Today
Solid Retail Sales and Rising Oil Prices Lift Treasury Yields, Spook Stocks
by Craig Dismuke, Dudley Carter
Solid Retail Sales Data Affirms Consumer Awakening: Retail Sales in April surprised the skeptics rising 0.3% MoM in April, while March’s data were revised up from +0.6% to +0.8%. Breaking the data down, gasoline sales rose just 0.8% MoM despite a 6.2% increase in average gasoline prices for the month of April versus March’s average. This presumably reflects a drop in usage. Building material sales rose 0.4% MoM, beating its 12-month average trend rate. Auto sales rose a more modest 0.1% MoM after the frothy 2.1% increase in March. Excluding the bigger ticket, more volatile categories, core sales rose a solid 0.4% MoM while March’s data print was notched up 1/10th to +0.5%. The April retail sales data affirms the expectation that the consumer is coming back to life after a December-to-February slumber.
Regional Manufacturing Report Strong; Homebuilder Confidence Ahead: The New York Fed’s regional report on manufacturing activity rose from 15.8 to 20.1, beating expectations. The new orders subcomponent jumped 7 points to 16.0, the number of employees index rose 2.7 points to 8.7, and the prices paid index jumped 6.6 points to 54.0 (highest level since June 2011). The only area of weakness was seen in the average employee workweek index which fell from 16.9 to 11.1. At 9:00 a.m. CT, the March Business Inventories report is expected to show another small uptick in inventories while the May Homebulder Confidence index is expected to hold at a strong 69.
Fed Governor-Nominees Go to Washington; Williams Speaks: At 9:00 a.m. CT, Fed Governor nominees Clarida and Bowman are scheduled to testify before the Senate Banking Committee. Marvin Goodfriend’s nomination remains hanging in the balance. Even more insightful may be San Francisco Bank President, the appointee for the powerful New York Bank President position, John William’s speech at noon to the Economic Club of Minnesota.
Yesterday – Stocks Notched Small Gains on Energy Boost Despite Rates Rising: Energy companies helped keep the S&P 500 (+0.09%) afloat on Monday as higher rates hurt the real estate and utilities sectors without offering an offsetting boost to financial companies. Brent nearly tripled U.S. WTI gain’s but both rose with traders pointing to the violence in the Middle East as compounding supply concerns initially sparked by the re-imposition of sanctions on Iran. Treasury yields were already up ahead of U.S. trading after an ECB Governor pushed European yields higher with speculation the end of net QE was drawing closer with rate hikes to follow in the subsequent quarters. In addition, a potential populist coalition in Italy had added upward pressure although negotiations appeared to still be ongoing. The higher yields held through U.S. trading as the 2-year yield closed up at 2.55%, a new high for the cycle, the 5-year yield added 2.4 bps to 2.86%, the highest since June 2009, and the 10-year yield finished 3.3 bps higher at 3.00%.
Overnight – 10-Year Set New High Since 2014 after Solid Retail Sales, Climbing Oil Prices: Ahead of this morning’s retail sales results, global sovereign yields had inched higher for a second day with the 10-year Treasury yield touching a key technical support level at around 3.03%. That nearly matched a late-April level that was the highest in more than four years. The 2-year (2.56%) and 5-year (2.88%) yields had both reached new highs for the cycle. The move up in yield occurred despite another day of uncertain sentiment sending global equities in different directions. U.S. futures were down around 0.3%. Oil prices had added pressure to yields after reaching new multi-year highs on continued concerns around Iran sanctions and conflict in the Gaza Strip. The spread between Brent and WTI reached its widest since April 2015. In the data, retail sales and fixed investment in China missed estimates for April while industrial production outpaced expectations. Growth for the Germany economy slowed more than expected to 0.3% in 1Q18 and a key expectations survey remained unchanged in May at its lowest level since 2012. After the solid read on U.S. retail activity, the 10-year yield jumped to up 5.1 (3.054%) as the entire curve shifted higher. That eclipsed its highest level from the Taper Tantrum and offered the most yield since 2011. The Dollar spiked and equities’ slump intensified.
No Surprises in Monday’s Fedspeak: Cleveland Fed President Loretta Mester (voter), a Fed hawk, hasn’t been discouraged by some softer indications on inflation and continued to call for further gradual rate increases. The Fed is “going to look through these transitory movements and look at where inflation is going. …I wouldn’t be surprised if we see the near-term inflation readings go higher.” She said the Fed could potentially move the overnight rate above 3% but balanced that by noting ”We want to give inflation time to move back to goal … this argues against a steep path,” She expects inflation to stabilize at 2% over the next couple of years. St. Louis’s Bullard (nonvoter) spent his prepared remarks on blockchain and cryptocurrencies but reiterated to reporters after his speech his belief the yield curve could invert within 12 months if the Fed moves forward with any additional rate hikes. He said the Fed’s preemptive hikes have been the driving force behind the flattening, not market worries.