The Market Today
Markets Wrestle with Conflicting Signals: ECB Cuts, Trade Detente, and Strong Retail Sales
by Craig Dismuke, Dudley Carter
Consumer Keeps on Trucking with Big Month for Auto and Building Material Sales: Retail sales beat expectations in August as the consumer continues to power the U.S. economy through the recent patch of angst. Headline sales doubled expectations rising 0.4% as auto sales doubled their 12-month run rate, up 1.8% in August. Building material sales also provided a boost, up 1.4%, while gasoline sales dragged 0.9% on lower gas prices. Removing the more volatile big ticket items, core retail sales rose 0.3% which was a slight deceleration from recent reports but in-line with expectations. By category, the core results were mixed. Health and personal care items, sporting goods, and online retailers posted the best results while consumers pulled back on furniture, clothing, and general merchandise store purchases. After two months of retail sales data, the consumer continues to surprise to the upside which should help lift 3Q economic growth a few tenths above economists’ expectations.
University Of Michigan Expected To Report Consumer Confidence Recovered In September But Remained Low: At 9 a.m. CT, the University of Michigan will release its preliminary assessment of consumer sentiment for September. After falling to a near-three year low in August amid escalated trade tensions, the index is expected to have edged higher on a recovery in both the current assessment and future expectations. Still, an as-expected result would show overall confidence remained at its second-weakest level since late 2016.
YESTERDAY’S TRADING ACTIVITY
Markets Whipsawed Around ECB Decision: Markets were whipsawed Thursday as investors attempted to make sense of the moving parts of the ECB’s new stimulus package amid a flurry of other developments. In front of the central bank’s decisions, markets had hardly responded overnight to news that the U.S. would delay the tariff increase on $250B of Chinese goods originally scheduled for October 1. However, the calm completely broke down after the ECB’s updated statement was posted to the Website.
ECB Surprised Markets With Comprehensive Changes: Adjusting almost every aspect of their policy stance, the ECB cut its deposit facility rate by 0.10% to -0.50% but introduced a tiered pricing system, tied its forward guidance to underlying inflation instead of the calendar, restarted its QE program at 20B euros per month on an open-ended basis, and sweetened the terms on its TLTRO III bank lending program. In the initial market reaction, the Italian 10-year yields sank 25 bps from its pre-announcement level while Germany’s dropped 6.9 bps. The Euro hit its weakest level against the Dollar since May 2017 and the Stoxx Europe 600 rallied to a new daily high.
Markets Reversed Initial Reaction, However, Amid Flurry Of Developments: However, despite Draghi announcing lower growth and inflation forecasts and saying risks remained tilted to the downside, the initial market reactions reversed mightily. After the U.S. CPI reported the firmest core rate in 11 years, the details of the ECB’s tiered deposit system showed a significant amount of reserves would be excluded from the -0.50% deposit rate. Just minutes later, Bloomberg reported White House advisers were working on a “limited trade agreement” that “would delay and even roll back some U.S. tariffs.” The deal would “freeze the conflict, rather than bring a final resolution.” Midday, an auction of 30-year Bonds tailed by 1.5 bps.
Draghi Likely Disappointed By Final Levels Of European Assets: Once every market had closed, the German 10-year yield had climbed 4.6 bps on the day, posting a 13-bp reversal from its low. The German 2-year yield rose even more, closing up 11.8 bps. The Euro strengthened 0.5% against the Dollar after weakening as much as 0.8% earlier. Treasury yields rose, but closed off their highs. The 2-year yield rose 4.5 bps to a six-week high of 1.72%, and is up 29 bps since last Wednesday. The 10-year yield climbed for a seventh day in a row, matching the longest run higher since 2012, adding 3.3 bps to 1.77%, a. The 10-year yield is 31.4 bps higher than last Tuesday, the biggest seven-day increase since the days after the 2016 presidential election. The S&P gained 0.3% and closed within 0.5% of its all-time high.
OVERNIGHT TRADING ACTIVITY
Trade Optimism And Central Bank Easing Favors Risks Assets: Before this morning’s important update on the U.S. consumer, risk markets continued to improve on the appearance of softening stances in the trade war just as major global central banks unwind some of the policy tightening from the last year. At around 6:30 a.m. CT, sovereign yields were adding to yesterday’s increase and equities were generally stronger. Chinese markets were closed for a holiday but Europe’s Stoxx 600 had risen 0.2% and U.S. futures were signaling the major indices could test their all-time highs Friday.
Trade Tensions Continue to Soften: A top adviser to President Trump quickly and strongly rejected a Bloomberg report Thursday that the White House was considering an “interim deal” to “freeze” the current trade tensions. However, later Thursday after markets closed, President Trump said “I’d rather get the whole deal done,” but an interim deal is “something we would consider I guess.” Overnight, a top Chinese news outlet said the government “will exclude some agricultural products such as soybeans and pork from the additional tariffs on U.S. goods” and “supports domestic companies in purchasing a certain amount of U.S. farm produce.” The latest moves add to optimism created earlier in the week after China created a tariffs exemptions list and President Trump announced a delay in the October 1 tariffs increase by two weeks.
Yields Moved Higher After Retail Sales Report: Immediately before this morning’s retail sales report, the 2-year Treasury yield had pulled back to unchanged on the day while the 10-year yield remained 2.3 bps higher. Following the solid retail sales data, the 2-year yield rose to up 4.0 bps on the day (1.75%) while the 10-year yield traded to up 6.8 bps (1.84%).