The Market Today

Retail Sales Show Consumer Off to Slow 4Q Start; U.S. and Chinese Officials Still Talking


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Retail Sales Show Consumer Off to Slow 4Q Start: Retail sales for October, in combination with September’s revisions, disappointed expectations.  Headline sales rose 0.26% MoM, in-line with expectations, but an out-sized portion of the gains came from a 1.10% increase in gasoline sales due to higher energy prices. A bright spot in the report, auto sales rose a solid 0.53%, but this was offset by a 0.48% decline in building material sales.  Core retail sales, excluding autos, building materials, and gasoline, rose 0.26% which was close to expectations.  However, September’s core sales were revised down from unchanged to -0.1% meaning that October’s advance was from a lower starting place.  Categorically, food and beverage, online retailers, and general merchandise sales were the only bright sports.  All other categories were disappointing, including a 0.9% MoM decline in furniture sales, a 1.0% drop in clothing sales, and a 0.8% decline in sporting goods sales.  All told, retail sales remain positive but are off to a slow start for the fourth quarter. Adding to the headwinds for 4Q consumption will be the shortest post-Thanksgiving holiday shopping season possible in a calendar year.

Empire Fed Index Remains Positive but Misses Expectations: November’s regional report on manufacturing from the New York Fed Bank was softer than anticipated, falling from +4.0 to +2.9.  The headline index remains in positive territory and there were encouraging underlying details, including gains in the new orders index and employment index.

Another Look at Manufacturing Output: At 8:15 a.m. CT, the Industrial Production and Capacity Utilization report is scheduled for release.  Key in the industrial production data will be the manufacturing output tally. It is expected to decline 0.7% MoM which would be the seventh month out of ten in 2019 to see contraction in manufacturing.

Financial Stability Report: While we will get a breather from the onslaught of Fed speakers today, the Fed is scheduled to release it Financial Stability Report at 1:00 p.m. CT.


YESTERDAY’S TRADING

S&P 500 Eked Out a Record in Another Quiet Session: Another quiet day for U.S. equities left the major indices mixed at the finish. For a second day, U.S. stocks avoided yielding to global weakness spurred by trade concerns and weak foreign economic data. The Dow was barely changed, down less than two points, while the S&P 500 rose less than 0.1%. Multiple signs last week of progress toward a trade deal had sent yields and stocks surging. However, mixed messaging from both sides since has reinvigorated uncertainty and frozen equities near record levels. The last three days have cumulatively been the fourth-quietest three-day run for the S&P 500 this year.

Treasury Yields Moved Lower for a Second Day Amid Renewed Uncertainty: While stocks have held onto most of last week’s gains, Treasury yields continued to unwind their prior-week rise. The 2-year yield dropped 4.5 bps on Thursday as the 10-year yield slipped 6.7 bps. After jumping 12.3 bps and 23.2 bps last week, the 2-year and 10-year yields have shed 8.5 bps and 12.2 bps, respectively, this week. For a second day, a large part of the net daily move occurred overnight ahead of U.S. trading. Several key economic reports from Asia and Europe disappointed and continued to reflect a weak global economy. Trends in recent weeks show how tough the 1.50% to 2.00% range for the 10-year note could be to break.


OVERNIGHT TRADING

U.S. Officials Give Markets a Shot of Trade Optimism: After declining in each session this week as questions returned about the likelihood of a trade deal, Treasury yields moved higher overnight on more optimistic comments and were holding those gains ahead of an important update on U.S. consumer spending. Thursday evening after markets closed, White House trade adviser Kudlow said the U.S. and China were in contact “every single day right now” and negotiators “are coming down to the short strokes” of the first phase of a trade agreement. The deal is “not done yet” but it is “close,” he said. Just a few hours ago, U.S. Commerce Secretary Ross said another call between negotiators was scheduled for today. Ross also said either a deal will be done or the tariffs will remain, but noted “in all likelihood” the outcome will be a deal.

Treasury Yields and Stocks Both Rose Before Retail Sales: While the comments included nothing that hasn’t been said before, they were enough to nudge global yields higher and push U.S. equity futures up to new records. Just before 7 a.m. CT, contracts on the S&P 500 were stronger by 0.3% and the 2-year and 10-year yields have moved up just over 2 bps. Similar moves were seen in foreign markets, as core European yields rose modestly and the Stoxx Europe 600 gained following a mostly-positive day across Asia. After the mixed morning economic data was released, Treasury yields trimmed their gains to just over 1 bp.


NOTEWORTHY NEWS

A Day Full of Fed News: Day two of Fed Chair Powell’s appearance before a congressional committee was similar to the first and void of any meaningful new news. Despite slowing growth and risks to the outlook, “The U.S. economy is the star economy these days,” Powell said. New York Fed President Williams echoed Powell’s take that both the economy and monetary policy are in a “good place.” Fed Vice Chair Clarida said the U.S. economy is close to meeting the Fed’s dual mandate, but that the current 3.6% employment rate may not be below true full employment. President Bullard from St. Louis said the Fed’s shift this year has been about more than just three rate cuts, noting policy is “considerably more accommodative today” and saying officials should “wait and see” how the economy responds. Dallas Fed President Kaplan said muted inflation has given the Fed the ability to be more aggressive in its search for the true level of full employment for the economy. In other Fed news, the New York Fed Trading Desk announced it was adding three additional longer-term repo operations, two with a 42-day term and one with a 28-day term, to help manage reserve levels around the end of the year.


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