The Market Today
Retail Sales Show Slower Start to 2Q But Better Revision for 1Q
by Craig Dismuke, Dudley Carter
Today’s Calendar – Retail Sales Disappoint to Start 2Q, CPI Inflation Weakens: Today’s economic calendar brings the most important reports of the week, and the early data has proven not so good. Retail sales for the month of April rose less than expected, up 0.4% at the headline level versus expectations of a 0.6% increase. However, the March data were revised 3/10ths higher from -0.2% in the initial release to +0.1%. The better March data took the steam away from the expected April increase. Building material sales were quite strong in April, up 1.2%. Auto sales also bounced back, alleviating some of the recent concern over declining sales, rising 0.8% MoM. Excluding gas, building materials, and autos; core retail sales rose just 0.2% versus expectations of a 0.4% increase. On an inflation-adjusted basis, core retail sales rose a meager 0.1% in April. On a positive note, inflation-adjusted core sales rose a revised 0.8% in March. As a result of this morning’s data, it now appears that 1Q GDP could be revised up an additional 2/10ths on less-weak consumption. However, 2Q GDP projections will take a hit from the weakness to start the quarter. Given the market’s preference for new news over old news, the disappointing 2Q impact could weigh on investors more than the positive 1Q figures.
The CPI inflation data also proved to be weaker than expected. Headline inflation rose 0.2% MoM brining the YoY rate down from 2.4% to 2.2%. Core CPI rose just 0.1% MoM, after falling 0.1% in March, bringing the YoY rate down to 1.9%. April’s 1.9% YoY rate was the weakest reading since October 2015. Driving the weakness in core inflation were lower prices for medical care (-0.16% MoM), apparel (-0.32%), recreation (-0.13%), and education and communication (-0.29%). Medical care inflation has now dropped to an annualized growth rate of 2.95% from 4.9% back in October. Housing inflation continues to hold steady at a 3.2% YoY growth rate. However, the wider-spread weakness in prices could give some pause to FOMC officials. As such, a June hike may become more data-dependent in coming weeks.
At 9:00 a.m. CT, the University of Michigan Consumer Confidence report is expected to remain unchanged at an elevated level.
Overnight Activity – Europe Outperforms in Quiet Overnight Session: European assets are leading a mostly positive session for global equities and the region’s common currency has outperformed the other major currencies overnight. Despite the marginally firmer tone in global equity markets, sovereign debts have been slightly bid and yields around the globe have inched lower. Except for in China, where 10-year government bond yields rose for a seventh week, the longest streak since 2013, as the government remains focused on addressing financial leverage in the system. Crude prices eased within the last couple of hours but remain up more than 3% on the week, cutting last week’s nearly 6% loss in half. Underneath the relative calm in global markets, economic data from Europe’s strongest economy provided reason for optimism. Germany’s economy expanded 0.6% in the 1Q, or 2.4% on an annualized basis, on a healthy pickup in investment, better export data, and steady consumer spending. Another data set showed manufacturing in the broader Eurozone firmed for a second month. Ahead of this morning’s U.S. data, Treasury yields were lower by roughly 1 bp across the curve, equity futures were negative, and the Dollar was unchanged. After the retail sales and inflation reports, Treasury yields fell further (2-year -2.4 bps, 10-year -3.2 bps) and the Dollar dropped.
Yesterday’s Trading Activity – Treasury Yields Decline as Stocks Weaken: U.S. stocks fell Thursday but slowly and steadily pared a steep drop that occurred in the first hour of trading. After falling as much 0.7% by 9:24 a.m. CT, the S&P ended down just 0.2%. Consumer discretionary stocks were the worst performing sector following more disappointing results from some big brick-and-mortar retailers. The Dollar was essentially unchanged after briefly spiking as the British pound sank following the latest policy announcement from the Bank of England. Crude prices held their overnight gains to close at the highest level in more than a week. After weekly government data on Wednesday showed declining U.S. inventories, representatives from Iraq and Algeria disclosed OPEC would likely extend the current production cut by six months when the group meets in two weeks’ time. The 2- and 10-year Treasury yields fell 2 bps to 1.34% and 2.39%, respectively; both near their lows of the day.