The Market Today
Consumers Take a June Breather After Strong Shopping in May
by Craig Dismuke, Dudley Carter
Consumers Take a June Breather After Strong Shopping in May: June’s retail sales data, likely the most important economic release of the week, was a bit disappointing at first glance, but reasonably strong upon deeper inspection. Headline sales rose a solid 0.49% MoM (12M avg. 0.54%) on strength in some of the more volatile categories. Gasoline sales rose 1.02% MoM, building material sales rose 0.84%, and auto sales were up 0.87%. Unfortunately, core sales excluding these three categories were down 0.03%. However, May’s core sales tally was revised up from +0.5% to +0.8%. As such, the cumulative sales data for 2Q now point to consumption growing a hearty 3.0% (SAAR).
Also released this morning, the New York Fed’s Empire Manufacturing Index pulled back from 25.0 to 22.6, beating expectations and remaining a strong indicator for manufacturing activity in the New York Fed region. At 9:00 a.m. CT, the May Business Inventories report is expected to show a 0.4% increase in inventories.
Overnight – China Growth Slows, Eurozone Trade Surplus Shrinks: A lack of excitement could be seen in global markets overnight with equities limping in with modest losses and sovereign bond yields inching just above where they ended Friday’s session. After recovering 3.8% last week and nearly pushing out of a bear market, China’s CSI 300 slipped 0.6% and was near the bottom of the Asian indexes. Even before the trade spate with the U.S., China’s economy had been in focus this year because of a possible growth slowdown as leaders there try and rein in the use of leverage. Overnight, data showed the Chinese economy slowed 0.1%, in line with expectations, to a 6.7% YoY rate. Retail sales were stronger in June but industrial production in China rose less than expected. Further west, the Eurozone’s trade surplus shrank for a third month to its lowest level since January 2017. While both import and export flows have risen in each month since February, imports have had more traction than exports. In a monthly survey of economists, Germany’s economic growth, sometimes used as a proxy for Eurozone-wide activity, was revised slightly lower leading economists to knock roughly 0.1% off of their interest rate forecasts. Before this morning’s U.S. retail sales report, Treasury yields were higher by almost 1 bps across the curve and U.S. futures were hovering around unchanged. After the big May revisions, the yield curve moved to its daily highs with the 2-year yield +1.7 bps to 2.60%, a new high for the cycle.
ICYMI – July 13, 2018 Weekly Market Recap: Longer Treasury yields were more heavily impacted by the latest tariffs announcement while shorter yields and U.S. equities were quicker to recover. Trading in the first two days of last week’s session depicted a typical risk-on move, with equities stronger and Treasury yields moving higher in response. Those trends were disrupted after equity markets closed Tuesday by the White House announcement of plans for a 10% tariff on an additional $200 billion of Chinese imports. Longer yields dropped and never perked back up, with the 10-year Treasury yield adding 0.5 bp on the week to end at 2.83%. The 2-year yield, however, added more than 4 bps to 2.58%, leaving the curve at a new cycle-low 2s10s spread of 24.3 bps. Equities, which faltered Wednesday on the White House tariffs report, snapped back Thursday and Friday leaving the S&P 500 1.5% stronger and at its highest level since February. Click here to view the full recap.
Vining Sparks 3Q Economic Outlook Webinar: In last week’s 3Q economic outlook webinar we discussed the economic developments that led the Fed to raise rates in June and project a slightly less gradual pace of tightening in their updated projections. While that has pressured short yields higher, several global forces (e.g. slow patch for global economies, concerns about a trade war) have created some uncertainty and kept longer yields in check. As a result, the yield curve has flattened to levels not seen since the Great Recession. Half of the time was spent observing historical examples of environments that accompanied flat and inverted yield curves and the potential implications for the economy and investors today. Click here for a copy of the slides and please reach out to your sales representative for a link to the replay or with any questions you might have.
July Bloomberg Survey of Economists and VS Projections: The July 2018 Bloomberg Survey of Economists shows economists continue to expect strong economic growth in 2018 and 2019 and are now more convinced that the Fed will get in a fourth rate hike in 2018. Click here to view the survey.