The Market Today

Markets Ignore NK Missile; Harvey Makes Landfall on Retail Sales Data

by Craig Dismuke, Dudley Carter

Today’s Calendar – Retail Sales Drop in August, Partially Storm-Related:  August’s retail sales were quite disappointing with headline sales falling 0.2% (exp. +0.1%) and core sales falling 0.2% (exp. +0.2%).  Gasoline sales did take a chunk out of consumers’ disposable income, rising 2.5% MoM ($874 million increase), ending a 6-month run of declining monthly gasoline sales.  Building material sales fell 0.5% MoM, well below the 12-month run rate of +0.6%.  And auto sales were, once again, very weak falling 1.6% in August.  Excluding those volatile, big-ticket items; core sales were particularly disappointing.  Electronics/appliances and clothing were notably weak categories falling 0.7% MoM and 1.0%, respectively.  Non-store retailers saw sales fall 1.1%, only the third decline in the last 26 months.  There were also slightly weaker revisions to the July sales data.  Going forward, building material sales should pick up as the Texas Gulf Coast and Florida rebuild following the past month’s hurricanes.  Auto sales are also likely to pick up after estimates that half-a-million cars were flooded (estimate from Cox Automotive Consultancy).  And gasoline prices should pull back from their recent increase giving consumers more disposable income. All told, the weak retail sales data is likely to be dismissed as partly related to Hurricane Harvey (landfall August 25).  Irma is likely to affect the September report.  The Fed will have to look through the possibly temporary, albeit uncertain, weakness in the retail sales data if they are to keep a December hike in their crosshairs.


Also released this morning, the September Empire Manufacturing index fell fractionally from 25.2 to 24.4 (beating expectations of a drop to 18.0).  The manufacturing data continues to beat expectations and is likely benefiting from Dollar weakness.  At 8:15 a.m. CT, the August Industrial Production/Capacity Utilization reports will be released giving another look at manufacturing activity.  At 9:00 a.m., the University of Michigan Consumer Confidence index is expected to pull back slightly from August’s report which was one of the strongest levels on record.


Overnight Activity – North Korean Missile, London Terror Hardly Faze Markets: North Korea launched another missile over Japan Thursday and an explosive device was detonated inside an underground train in London during the local rush hour. However, markets have largely overlooked both events. European equities did weaken after the London event was named a terror attack by local authorities but the Stoxx Europe 600’s 0.2% loss does not stand out and the index remains at one of its best levels since early August. Traditional safe havens actually weakened as gold tumbled and the Yen fell against every major currency. Sovereign yields shrugged off both events and added to their weekly rise. The sharpest market moves were seen in U.K. assets for a second day after the Bank of England hinted Thursday at a possible rate hike in coming months. The British pound extended yesterday’s rally and is up 1.3% against the Dollar to its strongest level since the week of the 2016 Brexit vote. U.K. sovereign yields are notably higher. The U.K.’s 10-year note is up 5 bps today, up 14 bps over the last two days, and 31 bps higher than last Thursday’s close. U.S. Treasury yields are also higher but trimmed those gains after this morning’s retail sales report. The curve is roughly 1 bp higher inside of 30 years. The 5-year yield is up for a sixth session. U.S. equity futures are down marginally. Lost in the geopolitical news, but worth noting, the Euro has quietly touched its strongest level of the week after the Eurozone’s version of the employment cost index rose in 2Q by the most since early 2015.


Yesterday’s Trading Activity – U.S. Markets Mixed following Inflation Jumps on Higher Gasoline and Rents: U.S. stocks finished mixed Thursday as a big jump in Dow industrial stocks lifted the broader index 0.20% to another record high. The industrials sector added 63 points to the index which rose a smaller 45 points on the day. Industrial companies within the S&P also strengthened but stumbles in other sectors left the overall index down 0.11%. Weakness in tech stocks caused the Nasdaq to underperform with a daily drop of 0.48%. Treasury yields jumped in lockstep with global yields after a more-hawkish-than-expected decision from the Bank of England and added to their morning climb following faster-than-expected U.S. inflation. However, those yield increases moderated after the details showed core inflation’s increase almost exclusively the result of higher rents. Shorter yields held most of their rise to close up 1.4 bps at 1.36%, the highest since July 25. The 10-year Treasury yield fell 0.4 bps to 2.19% after rising as much 3.5 bps earlier. Fed funds futures nudged the projected rate path upward after the report but the Dollar pulled back and weakened against most every major currency.

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