The Market Today
Retail Sales Finally Shine in July, June’s Activity Not So Bad After All
by Craig Dismuke, Dudley Carter
Today’s Calendar – Retail Sales Finally Show Signs of Life with Stronger-Than-Expected July and Positive Previous Months’ Revisions: Retail sales in July were much stronger than expected on a stand-alone basis and even better when considering prior months’ revisions. Headline retail sales rose 0.6%, doubling estimates and marking the best month of the year. Excluding sales of autos (+1.2%) and gasoline (-0.4%), sales improved 0.5% in July (expected +0.4%) in their second biggest jump of 2017. At the core level – which excludes auto dealers, gasoline, and building materials among other things – sales rose 0.6% (expected +0.4%), the best result since March. In the details of the report, the results were mixed within categories but the overall strength was relatively broad-based. Out of the 13 categories, 10 experienced sales growth when compared with June levels. The biggest positive contributions came from the autos, online retailing, and building materials categories. Sales at gasoline stations detracted the most while sales of electronics and clothing also declined. As to the revisions, each category was revised higher for June. Headline sales in June were reported up 0.3%, down 0.2% previously. Excluding autos and gasoline, sales were up 0.3% in June, down 0.1% previously. And sales at the control group were reported up 0.1% in June, down 0.1% in the initial release. Bottom line: The retail sales data series had been extremely disappointing so far in 2017 and had created some concern of a fading consumer. July’s report topped estimates across the board, and when considering the positive previous months’ revisions, finally offers some reprieve for retail sales. Although it’s just one month of data for the third quarter, the net effect is a stronger-than-expected trajectory heading into 3Q.
Later this morning, the NAHB will release its latest home builder index (June) and the Census Bureau will announce results for business inventories (June).
Overnight Activity – Global Return to Risk Continues as Markets See Less Near-Term Risk in North Korea: The overnight session reflected a continuation a Monday’s return into riskier assets as fears of an immediate conflict between the U.S. and North Korea continued to ease. Global stocks have strengthened for a second day and sovereign yields have continued to move higher. Less risk means less demand for gold and the Yen, both of which have continued to weaken. The Dollar improved to one its strongest levels in several weeks. Comments from North Korea’s leader overnight indicated a mid-August strike on Guam was not imminent as reports had indicated last week. Instead, North Korea will “watch a little more the foolish and stupid conducts of the Yankees.” While still aggressive, it was read as a walk back of the mid-August attack rhetoric. In global economic data, preliminary 2Q GDP results from Germany showed continued stable economic growth there while July’s inflation figures in the U.K. were, on balance, weaker than expected. Ahead of this morning’s U.S. retail sales data, stock futures were positive and the 2-year Treasury yield was up 1.6 bps to 1.33% with the 10-year yield higher by 3.7 bps to 2.26%. After the report, yields moved even higher (2s +3.2 bps and 10s +6.0 bps) and the Dollar jumped to its highs of the day.
Yesterday’s Trading Activity – Buy that Dip: Equities rebounded strongly Monday as investors raced to take advantage of last week’s sell-off. The Nasdaq bounced back 1.3%, the best day since June 28, after falling 1.5% last week. The S&P recovered 1.0%, its best day since April 24, after falling 1.5% last week in the worst weekly performance since March. The Dow underperformed but gained a solid 0.6%. The gains were built on broad-based strength with all sectors within the S&P, except energy, rising at least 0.5%. Energy companies slipped 0.3% on average as oil prices slid nearly 3% to start the week. Oil’s woes were attributed to a slower pace of refining in China last month, seen as a bearish demand factor for the commodity, which added to pressure from weaker-than-expected Chinese economic data earlier Monday. Treasury yields had been under pressure (higher) overnight but had recovered through lunch. However, remarks from NY Fed President Dudley (more below) quickly sent yields to their daily highs. The 2-year yield rose 2.4 bps to 1.32% as the 10-year yield added 3.0 bps to 2.22%. The Dollar also rose on his comments to finish as one of Monday’s top performers.
Dudley Says Fed may not be Done with Rate Hikes in 2017: Against the backdrop of a silent economic calendar, the latest words from NY Fed President Dudley caused the biggest intraday shifts in Treasury yields on Monday. Although the undertone of his comments was consistent with his statements last week, investors in U.S. Treasurys seemed to latch on to his statement that he would support another rate increase this year if the economy plays out as expected. The call was stronger than his language last week which simply indicated he expected inflation to rebound and the labor market to continue to improve. He appears more sanguine about inflation and the overnight rate path than most Fed officials that have made public comments as of late. He repeated his call for an announcement on normalization at the September meeting and speculated the plan will leave the balance sheet between $2.5 to $3.5 trillion five years from now.