The Market Today
Retail Sales Fuel Optimism of Sharper Consumer Recovery
by Craig Dismuke, Dudley Carter
Monitoring the Headlines on Reopening: With an increase in some states’ virus cases since restrictions were eased, the gradual reopening of economies has come under greater scrutiny. Vice President Pence said his team was watching case increases in some states and had a call scheduled with governors from some of those affected. New Jersey entered the second phase of its four-phase plan, which allows outdoor dining, non-essential retail, and daycares to open. New York’s governor said the state’s Western region would move to phase three today, which allows gatherings of up to 25 people, followed by the capital city on Wednesday. The NYSE said it would expand the partial reopening of its trade floor and JPMorgan announced half of its traders would begin coming back to work starting next week. California’s Governor noted the rate of hospitalizations and virus spread have stabilized. President Trump said his administration was considering a bonus to replace expanded unemployment which some see as a disincentive to return to work.
Retail Sales Fuel Optimism of Sharper Consumer Recovery: Retail sales rebounded more strongly than expected in May on strong construction activity, a big rebound in autos, and better activity across most categories of sales. Headline sales rose 17.7%, more than recovering all of the decline from April’s 14.7% decline. Looking at some of the bigger, more volatile categories, building material sales rose 11% MoM, continuing to reflect solid residential investment during this unusual period. Gasoline sales also jumped up 13% as oil prices stabilized. Autos and parts sales rebounded dramatically, up 44% after falling almost 40% over the previous two months Stripping out some of these more volatile categories (autos, gasoline, and building materials), core sales rose 11.0% and almost offset the 12.4% decline in April. Expectations were for sales to make up for between one-third and one-half of the April decline. Even though it was boosted by some unusual monthly gains which are unlikely to be sustainable for several months in a row, the May results are much better than was expected.
Manufacturing Output and Homebuilder Confidence: At 8:15 a.m. CT, the May Industrial Production report is expected to show manufacturing activity rebound 5.0% after declining 13.7% in April. At 9:00 a.m., the NAHB’s homebuilder confidence report is expected to show further improvement in sentiment.
Fed Chair Powell’s Semi-Annual Testimony to Senate Committee: Fed Chair Powell will deliver his semi-annual testimony to the Senate Banking Committee this morning at 9:00 a.m. CT. After last week’s FOMC decision and Powell press conference, we do not expect to learn anything significantly new this morning.
Volatile Monday as Equities Erased Steep Losses: U.S. equity markets, already aching to recover after a steep opening drop, moved even higher after a couple of shots in the arm from the Fed. Global stocks had earlier sold off following weekend developments showing a continued increase in cases across several U.S. states and an uptick in new infections in China. Consistent with a sharp overnight decline in futures, the S&P 500 fell as much as 2.5% in its first few minutes of trading. However, the index quickly turned higher and completely erased its loss by the close. Along the way, the Fed announced the opening of its Main Street Lending Program, said it would ask for feedback on expanding the program to nonprofits, and disclosed it would launch individual corporate bond purchases by its Secondary Market Corporate Credit Facility (more below).
Credit Spreads Tightened with the Fed Set to Buy an Array of Corporate Bonds: The latter headline led to the most notable shift on intraday market charts and cemented the S&P 500’s 0.8% daily gain. Credit spreads also came in sharply. After modest moves around unchanged in the morning, the iShares IBoxx Investment Grade Corporate Bond ETF, known by its LQD ticker, closed up 1.4% (prices up, yields down). Treasurys were less changed on net, but did close well off their lows. After declining overnight amid the global equity weakness, the 2-year yield dipped 0.4 bps to 0.19% while the 10-year yield edged up 1.8 bps to close at 0.72%, its high mark for the day. The 10-year yield had shed as many as 5.2 bps overnight. The U.S. dollar fell sharply amid the market reversal and U.S. WTI erased losses of as much as 5.2% to close 2.2% higher to start the week.
Details Shift but Story Stays the Same: While the specific details vary from day to day, the broader market paradigm has remained consistent for weeks. On the one hand, investors have shown trepidation when cases pick up in areas where the virus previously appeared under control. As discussed above, this was the driving force of Monday’s early sell-off. On Tuesday, Beijing implemented further measures to prevent additional spread of a new cluster of cases tied to a food market. On the other hand, powerful and persistent stimulus efforts have provided sustenance for markets. It was additional Fed stimulus that flipped market sentiment sharply positive during yesterday’s U.S. trading. That upward momentum was strengthened overnight by more signs that fiscal and monetary policies will remain loose until economic recovery is well under way.
Stimulus Efforts Stir Another Equity Rally: The Bank of Japan kept its main policy tools unchanged Tuesday but enlarged its emergency lending program for Japanese businesses by more than $300 billion to approximately $1 trillion. Governor Kuroda later said “we’re a long way from a situation where we can raise rates,” a sentiment echoed by Australia’s central bank in its latest minutes. However, the most noticeable move up for markets overnight came on a Bloomberg report that the White House is working on a $1 trillion infrastructure package. After sending stocks in Asia up more than 3% and lifting Europe’s Stoxx 600 by 2.9%, the developments had boosted S&P 500 futures by 1.8% ahead of this morning’s retail sales report. After climbing as high as 0.77%, the 10-year Treasury yield was 3.5 bps higher at 0.76%. The daily rise increased to 4.5 bps after the stronger-than-expected recovery for retail sales.
Fed Announced Start of Individual Corporate Bond Purchases: The Federal Reserve announced that its Secondary Market Corporate Credit Facility (SMCCF) “will begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers.” Per the press release, “the SMCCF will purchase corporate bonds to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds. This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity, and other criteria. This indexing approach will complement the facility’s current purchases of exchange-traded funds.”
A Couple of Fed Officials Not Sold on Formally Controlling the Yield Curve: A couple of Fed officials showed a preference for outcome-based forward guidance but sounded skeptical, as of now, about adding yield curve control to the central bank’s primary toolkit. On other topics in their separate appearances, President Kaplan from Dallas said he believes the economy began recovering in June while President Daly from San Francisco said she expects the “current stance of highly accommodative monetary policy to continue until the economy has largely recovered what’s been lost due to the virus.” Daly also stressed the need for “sustained [fiscal] investments in our economic future” and said the low-rate environment provided lawmakers an excellent opportunity to do so.