The Market Today

Core Retail Sales Snap a Solid Six-Month Streak with a Flat September


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Core Retail Sales Snap a Solid Six-Month Streak with a Flat September: Consumer spending was much weaker than expected in September according to the latest retail sales report from the U.S. Census Bureau, snapping a solid six-month run for the series. Headline sales fell 0.3%, disappointing expectations for a 0.3% gain. At the control group level, which feeds into GDP estimates, sales rose just 0.04%, short of the 0.3% gain that was expected. There was notable weakness in the non-core categories, as autos fell 0.9%, gasoline sales dipped 0.7%, and building materials dropped 1.0% to lead all declines. However, the softness was widespread throughout the report. Only five of the 13 categories rose from August and most were weaker than their twelve month averages. Solid activity in July and August should notch another solid quarter for personal consumption, but the September data will weigh on growth estimates and shows momentum has slowed.

Mortgage Applications Rise Despite Purchases Dropping to a Six-Week Low: For a second week in a row, total mortgage applications ticked higher despite weakness within purchase activity. Total applications rose 0.5% as refinancing activity gained 3.6% but purchase applications pulled back 4.1% to a six-week low, the largest weekly decline since February. The MBA’s 30-year contract rate measure ticked up 0.02% to 3.92%, but remains near its lowest level since 2016. The recent softness if purchase application is a blemish for the housing sector which had show signs of perking up in response to declining mortgage rates.

Home Builder Confidence Expected to Hold Steady: The October report from the NAHB is expected to show home builder confidence remained steady in October, matching its strongest level since last May. Interest rates have been volatility in recent weeks amid the push and pull of weaker economic data and positive developments on trade and Brexit.

A Few Fed Headlines: Three Fed officials are scheduled to make remarks before and after the latest Beige Book is published at 1 p.m. CT. Both current-year voters, Chicago’s Evans will make comments at 9:45 a.m. with Governor Brainard slated to speak at 2 p.m. Dallas Fed President Kaplan, who votes on policy beginning in January, is scheduled for a noon appearance.


YESTERDAY’S TRADING ACTIVITY

Stocks Rallied on Solid Earnings: Stocks rallied Tuesday on the back of upbeat corporate earnings while Treasury yields were also pressured higher by hints that a Brexit deal was in reach. UnitedHealth Group led all gains within the S&P 500, surging more than 8% after an upbeat earnings report and lifting the health care sector to a first-place finish. Johnson and Johnson also applied upward pressure with better-than-expected quarterly results. Despite mixed bank earnings Tuesday, JPMorgan helped boost sentiment across the financials sector as revenue and earnings both exceeded expectations. Shares of JPMorgan gained 3.2% and flirted with the all-time record high. Citigroup’s earnings also exceeded expectations. The S&P 500 closed up 1% and near its highest level in a month.

Yields Pressured Higher by Earnings and Brexit Hopes: Treasury yields moved higher as stocks strengthened and the curve steepened as gains for longer maturities outpaced shorter yield increases. The 2-year yield rose 2.7 bps to 1.62% and the 10-year yield climbed 4.2 bps to 1.77%, widening the spread between the two to 14.7 bps, the most since August 1. The biggest move up in yields occurred around 9:30 a.m. CT as U.K. Gilt yields surged on reports of a possible Brexit deal. With the end-of-the-month Brexit deadline in sight, a couple of EU officials indicated that a draft legal agreement could be in reach. The U.K. 10-year yield jumped as many as 8.5 bps before settling back to close 5.3 bps higher. While the draft would signify meaningful progress, key uncertainties remain. The British pound, however, rallied to a five-month high. Since rumors of a deal began swirling last week, the currency has posted its best four-day run in over a decade.


OVERNIGHT TRADING ACTIVITY

Irish Backstop Remains a Brexit Headwind: U.S. equity futures softened modestly overnight and Treasury yields ticked lower on renewed concerns the recent progress towards a Brexit agreement had stalled. The Irish backstop continues to be a major point of contention that poses risks to the successful passage of a deal through the U.K. parliament. After solid increases yesterday, the U.K. Gilt curve had pulled back with the 10-year yield down 3.1 bps. The British pound and FTSE 100 also ticked lower. Those moves reversed, however, on a headline that Northern Ireland’s Democratic Unionist Party (DUP) had accepted the most recent proposal.

U.S. House’s Hong Kong Bills Tighten Tensions with China: In addition to the Brexit cautions, tensions between the U.S. and China tightened in response to developments involving Hong Kong. The U.S. House of Representatives passed several bills in support of the pro-democracy push in the region, drawing a sharp response from the Chinese government. A statement released by its foreign ministry noted, “If the relevant act were to become law, it wouldn’t only harm China’s interests and China-U.S. relations, but would also seriously damage U.S. interests, …China will definitely take strong countermeasures in response to the wrong decisions by the U.S. side to defend its sovereignty, security and development interests.” After swinging about amid the headlines, Hong Kong’s Hang Seng rose 0.6%.


NOTEWORTHY NEWS

Daly Didn’t Speak to the Outlook, But Said Recent Cuts Should Keep the Economy Going: San Francisco Fed President Daly said Tuesday that the consumer data are providing some “really good signs” about the economy, but there are a number of headwinds “have started to gust.” The Fed’s actions to lower rates in July and September were “To ensure we sustain the expansion against these headwinds.” She added, “This [recent] accommodation should help the economy continue to grow so that we can make further progress on our mandated goals of full employment and price stability,” and later told reporters she wanted to see more data before deciding what the appropriate next step would be.


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