The Market Today
Key Reports: Tuesday’s Retail Sales, Wednesday’s Fed Minutes, Friday’s Consumer Confidence
by Craig Dismuke, Dudley Carter
This Week’s Calendar – Retail Sales Expected to Rebound, Focus of the Fed Minutes will be on Inflation Discussion: This week’s calendar will include several key economic reports. After an empty economic calendar today, the data will kick off in a big way tomorrow with July’s retail sales. The July report is projected to show a much needed bounce in consumer spending. Retail sales at the core level fell short of estimates in May and June and have shown weaker momentum in each month since March. Headline and core sales are both expected to have increased 0.4% in July. Paired with softer inflation recently, the real impact of healthy nominal gains should be a positive for real growth in the second month of the quarter. Also on Tuesday, the NAHB’s home builder confidence index is expected to hold at 64, the lowest level since November.
Wednesday’s morning data will be heavy on the housing sector. Housing starts are expected to have inched higher in July while new permit activity is expected to have declined; both experienced impressively strong improvements in June. However, the housing data will likely have little market impact as investors will be focused on the Fed Minutes from the July meeting later that afternoon. We expect the Minutes to show widespread agreement that balance sheet normalization should be announced at the Fed’s next meeting in September. The more interesting analysis will involve parsing through the various views on inflation. Recent Fedspeak has indicated a growing caution across the Committee about the weakness in inflation which could potentially affect the Fed’s outlook for another rate hike by year-end.
Thursday’s calendar includes mostly secondary reports with the July industrial production data and the August Philadelphia Fed Outlook Index the most notable.
Friday’s consumer confidence index from the University of Michigan is expected to show only a modest improvement in August. At 94.0, the index would remain at its second lowest level since November. The details of the report are expected to show the headline improvement to be driven by future expectations. If so, and if retail sales rebound as expected, these firmer expectations could further support the notion of a stable-to-faster pace of consumer spending in the near term.
Dallas Fed President Kaplan is the only Fed official currently scheduled to offer remarks this week (Thursday and Friday). Given his comments last week, the markets already have insight into his updated paradigm and, as a result, may show little in the way of a response.
Overnight Activity – Nothing New on North Korea Nixes Market Fear for Now: In the absence of any furthering over the weekend of the recent rhetoric between the U.S. and North Korea, global markets have shown a response of relief so far Monday. Global equities rebounded except for a 1.0% loss for shares in Japan. Sovereign yields have reversed higher after falling for most of last week on the rising geopolitical tensions. The bid for other safe haven assets also waned with gold pulling back from a more-than-two-month high last Friday. The Dollar recovered most of Friday’s fall caused by another weaker-than-expected CPI report. With North Korea out of the spotlight for now, markets looked to economic reports from Asia for early-week signals. Japan’s 2Q GDP was much stronger than expected, rising at a 4.0% QoQ annualized rate; easily the best quarter since 1Q 2015. Data from China was not as impressive. Year-to-date retail sales, fixed investment, and industrial production all missed analysts’ expectations in July. U.S. equity futures signal a strong open and the Treasury curve regained a bit of steepness. The 2-year yield is up 1.2 bps to 1.31% with the 10-year yield 3.0 bps higher at 2.22%.
ICYMI – August 11 Weekly Recap: Yields fell last week as investors sought out safer assets in the face of heightened geopolitical uncertainty involving the U.S. and North Korea. Yields in both the U.S. and Europe touched levels last seen in June. The 2-year Treasury yield dropped 6 bps and the 10-year yield shed 8 bps as a war of words between the leaders of the two countries unfolded. U.S. stocks fell the most since March (Dow and S&P) and June (Nasdaq) and European stocks experienced their worst week since November. Markets essentially ignored the several Fedspeakers and showed only modest intraday responses to U.S. economic data. Job openings hit a new record high in the June JOLTS report and business confidence rose for the first time since January. Consumer price inflation missed estimates for a fifth month in July. Click here view or print the full recap.