The Market Today
Retail Sales and Trade Negotiations to Dominate Headlines This Week
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
April Retail Sales Set up to Disappoint This Week, but Eventually Rebound: This week’s calendar is fairly quiet but will bring a couple of important reports. Tuesday and Wednesday will bring the May Homebuilder Confidence Index (at a very high level already) and April’s Housing Starts and Building Permits report (languishing a bit lately). More important will be Tuesday’s report on April’s Retail Sales. After a weak start to the year, March’s retail sales data were strong and economists expect April’s to be likewise. However, weaker credit card spending data, weather issues, and higher gasoline prices may cause the sales data to disappoint. Given the strength of the consumer balance sheet and improving income statement, this should be a temporary blip.
Fed Officials Unlikely to Be Moved by Recent Run of Weaker Inflation: There will also be a small deluge of Fedspeak this week. After the recent run of weaker-than-expected inflation (average hourly earnings, CPI, PPI, import prices, U.K. inflation, and E.U. inflation to name a few), investors will be listening for any shift in tone from Fed officials. It is unlikely that they respond so quickly to weaker inflation readings and would rather wait until they see a string of weaker data.
Trade Negotiations May Turn More Encouraging: Finally, U.S. officials will continue trade negotiations with Chinese officials. This administration has previously begun negotiations with attention-grabbing headlines that sound as though they lack diplomacy. However, after those initial comments, the negotiations tend to appear more sensible. This may well be the case again. Already overnight President Trump tweeted out that he is in negotiations with President Xi on how to get ZTE back in business fast. ZTE is a Chinese cell phone manufacturer who reports say is close to shuddering after U.S. officials banned companies from selling components to ZTE. If more headlines emerge from the trade negotiations that make a trade war seem unlikely, the markets could respond with a risk-on sentiment.
Overnight – ECB Chatter, Italian Politics Push Up European Yields: Sovereign yields have risen to start the week while equities have so far traded in different directions. European yield curves were higher and steeper after an ECB governor said the end of net asset purchases was getting closer and clarified the “well past” forward rate guidance was denominated in quarters, not years. The ECB’s current policy stance includes a pledge to leave rates unchanged “well past the horizon of the net asset purchases.” Also weighing on peripheral country yields was a potential parliamentary coalition in Italy. Elections in March resulted in a hung parliament and expectations for a do-over in June. However, Five Star and the League, Eurosceptic parties with enough combined support for a majority, struck a deal Sunday to form a coalition. The pair supports a flat tax, universal basic income, more benevolent pensions and is not chummy with the EU establishment. The Italian 10-year yield was up 4.8 bps and Italian equities were leading European equities lower. Earlier, Chinese shares guided most Asian indexes to a positive finish. President Trump tweeted Sunday that the administration was revisiting a previous order that disallowed U.S. companies from providing parts to a major Chinese telecommunications equipment producer. In the U.S., equity futures had firmed, the Dollar had drifted lower, and the 10-year Treasury yield had added 1.1 bps to 2.98%.
ICYMI – May 11, 2018 Weekly Market Recap: Inflation remained in focus last week as several separate reports further eased concerns about a ramping up of price pressures in the pipeline. The message was consistent across the most recent readings for import, producer, and most importantly consumer prices. Stripping out firmer price increases for energy and food, core CPI inflation missed estimates at 0.1% MoM which kept the YoY rate unchanged at 2.1%. Shelter prices, the most heavily weighted component, were firmer and medical prices inched higher. But a big drop in auto pricing led softer results elsewhere. More broadly, when combining the continued subdued inflation with persistent signs of a tight labor market, the confusion around the shape of the Phillips Curve continued. The March JOLTS report showed another record openings figured that pushed the number of available workers per opening down to 1.01, the lowest in the series’ history. Also in focus was the president’s announcement that the U.S. would withdraw from the Iran nuclear deal. Oil prices were firmer on the week. The boost to energy companies from higher oil prices and implications of still-stable inflation for (gradual) Fed policy pushed stocks to their best week since March and nudged Treasury yields higher. Click here to view the full recap.