The Market Today
Retail Sales Show Solid Start to 3Q Consumption Data
by Craig Dismuke, Dudley Carter
Retail Sales Start 3Q Data on Solid Note, High Bar to Keep up with 2Q’s Pace of Consumption: July’s Retail Sales report starts the 3Q consumption data off on solid footing with headline and core sales both beating economists’ expectations. Headline sales rose 0.5% MoM but the June data were revised lower to show just a 0.2% increase (originally reported up 0.5%). Gasoline state sales rose 0.8% MoM as the year-long increase in gasoline prices (from $2.25 per gallon to near $3.00 per gallon) has eased in recent weeks. Gasoline prices have now holding near $2.85 per gallon for two months. Building material sales, which filter into the GDP reports in the residential investment category, were flat in August, another indicator of a weaker housing market. Auto sales rose 0.2% MoM, slightly below the recent run rate. Excluding those items, core sales rose 0.46% MoM, another very solid reading. However, while the July data started strongly, August and September will have to see even stronger data to keep 3Q consumption anywhere close to 2Q’s outstanding 4.0% growth rate.
Productivity Best in Three Years, Trend Rate Remains Near-1%: Nonfarm productivity posted a good quarter in 2Q, rising 2.9%, its best rate of gain in three years. However, that result comes on the heels of two extremely weak reports. All told, the year-over-year rate of productivity growth is now at 1.3%, right in-line with its post-recession trend rate. With the strong productivity result, unit labor costs fell 0.9% during the quarter, bringing the year-over-year rate down to 1.9%, slightly firmer than the post-recession trend. Productivity continues to be a challenge for this cycle. If you’re an optimistic, you’d likely say the first quarter that showed the full impact of recent tax, fiscal, and regulatory policy changes under the new Administration at least produced an uptick in productivity. If you’re skeptical, the question going forward is if this can be sustained.
Empire Fed Manufacturing Report Shows Another Solid Result: The New York Fed’s regional report on manufacturing activity continued to trend higher in August, rising from 22.6 to 25.6 and beating expectations for a pullback to 20.0. The increase was driven primarily by an increase in shipments and unfilled orders, both up 11.1 points for the month and an indication of strong current activity. New orders remained strong but pulled back from July’s strong reading. The number of employees index also pulled back but the average employee workweek increased.
Mortgage Applications Continue to Struggle on Higher Rates: Mortgage applications for the week ending August 10 fell 2.0% on a 3.3% decline in purchase applications and unchanged applications for refinance. This marks the fifth weekly decline in purchase apps, matching the longest run since 2009. On a 4w/4w basis, purchase applications are now down 9.5% over the past three months and point to a 7% decline in home sales over the coming months. The 30-year mortgage rate peaked three months ago at 4.86% and has since held near that level, now at 4.81% in the August 10 report.
Manufacturing, Inventories, and Homebuilder Confidence: At 8:15 a.m. CT, the July Industrial Production and Capacity Utilization report is scheduled for release. The manufacturing output data will be the focus with strength in the sector surging recently. At 9:00 a.m. CT, the June Business Inventories report is expected to show a small increase in inventories. Any unexpected result could alter expectations for 2Q GDP revisions. And at 9:00 a.m. CT, the NAHB’s August report on builder confidence is expected to show homebuilder’s remaining optimistic despite some weaker housing numbers recently.
Yesterday – Stocks Snapped Four-Day Losing Streak as Lira Recovered Amid Respite from Recent Plunge: U.S. stocks recovered Tuesday despite European equities giving up overnight gains by the close. The S&P 500 rose 0.6% and was boosted by gains in all 11 underlying sectors. Consumer discretionary companies rose 1% to lead all sectors. Financials closed right on their heels at up 0.9%, helped out by the country’s biggest banks adding more than 1%. Utilities lagged other sectors but managed a modest 0.2% increase. The Nasdaq rose 0.7% while the Dow trailed with a positive 0.5% tally. As stocks gained, Treasury prices remained under pressure. The 2-year yield closed 2.5 bps higher at 2.64%, its high watermark for the session. The 10-year yield added a slightly smaller 2.0 bps to 2.90%. Other maturities rose by similar amounts. By the end of the day, the spread between the 2-year and 10-year notes had inched lower by 0.5 bps to 25.8 bps, the fifth consecutive flattening to the sixth lowest of the cycle. Among other notable moves was a fourth day of strengthening that took the ICE Dollar index to its highest level since June 2017. Calmer waters in Turkey had allowed global risk sentiment to rebound overnight ahead of the U.S. session. During U.S. trading, the Lira extended its 5% overnight gain to close up nearly 9% for the day.
Overnight – Global Equities Slip Further Despite Another Positive Day for the Lira: The positive turnabout that took U.S. equities higher Tuesday fizzled as Asian markets kicked off Wednesday’s global session. Despite another 3% improvement in the Turkish Lira, which is up 12% since Monday in response to measures taken to stem its decline, global equities lost support overnight. Shares in China were the worst performers globally on Wednesday, with the three major indexes off more than 2%. A day after data showed some slowing of activity in July, the Chinese yuan slipped to a 20-month low against the Dollar. All major European bourses were weaker and helping to push the Stoxx Europe 600 down 0.8%. Materials companies were the biggest drag with companies in the metals and mining space at the bottom of the list. Precious metals were leading steep losses across global commodities, which were under pressure in response to continued strength in the U.S. Dollar. The Dollar inched higher for a fifth session to a new 14-month high. Ahead of this week’s busiest day of U.S. economic data, U.S. equity futures were pointing to a reversal of yesterday’s gains amid the global selling. Futures on the S&P 500 were off 0.5% and outperforming. Treasury yields were the most changed of the majors, with the curve flattening on lower yields. The 2-year yield had dropped 1.2 bps while the 10-year yield fell 3.1 bps, pushing the spread between the two under 24 bps to a new low for the cycle.
Consumer Credit Grew in 2Q But Remained Manageable in Context of Incomes: Consumer credit data from the New York Fed showed total outstanding debt rose for a 16th straight quarter to $13.3 trillion. The $82 billion increase in the three months ended June 30 was driven primarily by higher outstanding balances for mortgages, auto loans, and credit card debt. Outstanding amounts tied to consumers’ HELOC accounts dropped, as did the total for student loans. In a more meaningful context, the ratio of total outstanding credit ($13.3 trillion) to disposable personal income ($15.5 trillion) dropped to 86.0%, a new low for the cycle. As to credit quality, the same report noted that overall delinquency rates notched a small improvement from 1Q despite higher flows into seriously delinquent categories for autos and credit cards. The report pointed out the noted improvement over the last 12 months in the share of student loans entering the seriously delinquent category. As for future potential credit growth, total credit inquiries were generally unchanged near the lowest level of the survey’s history.