The Market Today
Retail Sales Remain Resilient
by Craig Dismuke, Dudley Carter
Retail Sales Remain Resilient after Stimulus Pop: Retails sales remained very strong in June, rising 0.6% MoM and beating expectations for a 0.3% decrease. Gasoline sales rose 2.5% and building material sales fell 1.6%. Nominal auto sales fell 2.1% despite the price of autos rising sharply. Excluding these categories, core sales rose 1.1% on fairly broad gains. Two of the categories that benefited from limits on mobility, home furnishing and sporting goods, declined in June. Apart from that, the other core sectors all showed monthly gains. The last sector to recover its lost activity, food services/drinking places which completed its recovery in April, was up another 2.3%. Spending on this category has shown one of the strong rates of gains, going back to March, as activity has reopened.
Consumer Confidence, Inventories, and Fedspeak: The University of Michigan’s consumer confidence report is expected to improve on better current and future outlooks (9:00 a.m. CT). Also released this morning, the May business inventories report (9:00 a.m.) which is expected to show a 0.5% recovery. New York Fed Bank President Williams will speak at 8:00 a.m. He spoke earlier in the week affirming his belief the Fed needed to be patient.
24 HOURS OF MARKET ACTIVITY
Longer Treasury Yields Threaten Five-Month Lows As Downtrend Holds: Tech shares weighed on U.S. equities Thursday, despite the latest decline in Treasury yields gaining steam. The Nasdaq led losses on Wall Street, sliding 0.7%, while losses in tech names helped drag the S&P 500 0.3% lower. The Dow managed to close with a 0.2% gain. Within the S&P 500, energy companies were the only group that underperformed the tech sector, falling 1.5% as crude prices pulled back. U.S. WTI for August delivery fell 2% to below $72 per barrel, its lowest level since mid-June, on reports that Saudi Arabia and the UAE were making progress on reconciling disagreements that recently spoiled an agreement to raise production quotas from August. Weakness for U.S. equities mirrored daily trends across Europe and most of Asia. As equities backpedaled, longer Treasury yields extended their most recent decline. The 10-year yield jumped more than 5 bps Tuesday following a hot CPI report and a weak auction of 30-year bonds before sliding 7 bps on Wednesday as Fed Chair Powell remained steadfast in his belief that strong inflation will be transitory. Carrying forward that momentum, the 10-year yield fell another 4.7 bps Thursday to 1.299%, having earlier touched 1.291%, its second lowest level since mid-February. Shorter yields remained less temperamental, with the 2-year yield unchanged at 0.223%.
For Second Time in As Many Weeks, Treasury Yields Attempting To Move Up From Technically Stretched Levels: Treasury yields were climbing ahead of U.S. trading, but swimming upstream as global equities retained a soft tone and European yields pushed even lower. At 7 a.m. CT, a half hour ahead of the release of June’s retail sales update, the 10-year yield had risen 1.8 bps to 1.317% and the 2-year yield had added 1.2 bps to 0.236%. Those moves were in contrast to a collective decline for European sovereign yield curves. U.K. yields were leading regional declines with its 10-year yield down 2.4 bps to 0.64%, reversing a rise in the prior session on hawkish central bank commentary. Germany’s 10-year yield had declined 1.3 bps to -0.35%, its lowest level since late March. Farther east, Japan’s 10-year yield inched up 0.5 bp to 0.01% after touching a more than six-month low on Thursday and following the Bank of Japan’s decision to keep monetary policy unchanged. The Japanese Nikkei, however, dipped 1% as the central bank downgraded its growth estimate for this year as the country struggles with rising virus cases. U.S. equity futures had gained roughly 0.2% in the minutes before the retail sales data were released, and Treasury yields were holding their modest overnight gains. The initial reaction to June’s better-than-expected sales data was for higher yields, although softer revisions for May pulled yields back down.
In Yesterday’s Fed News: Fed Chair Powell appeared before the Senate Banking Committee on Thursday for the final day of his semi-annual testimony on monetary policy. Again, Powell faced tough questioning about strong inflation readings. Again, he said he expects most of the pressures will fade over time. “A handful of things tied to reopening are driving higher inflation,” Powell explained, repeating that, “We don’t see broad inflation going up in a lot of categories.” Nonetheless, Powell admitted, “The challenge we’re confronting is how to react to this inflation, which is larger than we had expected – or that anybody had expected, …to the extent it is temporary, it wouldn’t be appropriate to react to it. But to the extent it gets longer and longer, we’ll have to re-evaluate the risks.” Current Treasury Secretary and former Fed Chairwoman Yellen is of a similar view, saying later on CNBC that “We will have several more months of rapid inflation. …But I think over the medium term, we’ll see inflation decline back toward normal levels. But, of course, we have to keep a careful eye on it.”
Chicago Fed President Evans spoke during Powell’s testimony in a separate appearance and indicated he agreed with the Fed Chair. He said he expects growth of 7% this year and 3% next year, with unemployment falling from its current level of 5.9% to 4.5% by the end of the year and to below 4% by the end of 2022. While he expects core PCE to remain elevated at 3% at the end of this year, he said he has confidence inflation pressures will normalize. Assuming the jobless rate does fall close to 4.5% by the end of the year, Evans could support beginning to taper asset purchases. St. Louis Fed President Bullard, however, is becoming impatient on beginning to wind down monthly bond purchases. Earlier Thursday, Bullard said on Bloomberg TV that he believes “substantial further progress” has been made towards both of the Fed’s goals and that he thinks “it is time to end these emergency measures.”