The Market Today

Retail Sales Slow as Fed Prepares to Tweak Policy Communications


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Monitoring the Virus Headlines: The fight in Washington over more stimulus to help offset portions of the pandemic’s economic damage was back in the headlines on Tuesday. Talks between the White House and Democratic leaders broke down weeks ago and a “skinny” bill proposed last week by Senate Republicans was killed before it could even be brought to an official vote. A bipartisan group of lawmakers from the House issued a compromise bill on Tuesday that would include roughly $1.5 trillion of new stimulus. The proposal from the Problem Solvers Caucus includes a second wave of direct payments to Americans, a resumption of expanded unemployment benefits into 2021, and monies for state and local governments. Top Democrats, however, said the bill was insufficient.

 

TODAY’S CALENDAR

Fed Required to Adjust Several Communication Levers in Today’s Decision:  The Fed will conclude their much-awaited September policy meeting today, releasing their Official Statement and updated SEP at 1:00 p.m. CT.  Chair Powell will host a press conference at 1:30 p.m.   While we do not expect an explicit easing of policy this week, there are many levers the Fed will likely tweak.  We will specifically be watching for how the new policy framework, released during the Jackson Hole summit, will affect their guidance (Official Statement) and forward projections (Summary of Economic Projections).  As for the dot plot, this will be the first look at 2023 projections.  In the June dots, only two officials expected liftoff to occur by 2022.  We expect the median Fed Funds range projection for year-end 2023 to be 0.00-0.25%, but close to half of participants projecting liftoff during the year.

Pace of Gain for Retail Sales Slows: Retail sales rose another 0.6% in August, disappointing economists’ expectations but continuing to grow despite already outpacing pre-virus levels.  Economists expected sales to be up 1.0%.  In addition to the softer August tally, July’s sales were revised down from +1.2% to +0.9%.  Auto sales rose a softer 0.2%, gasoline sales gained 0.4%, and building material sales recovered most of July’s weakness rebounding 2.0%.  Excluding the big ticket items, core sales actually declined 0.1%, the first monthly decline since April’s 12.4% drop. On a positive note, nine of thirteen categories saw improvement but a 5.7% decline in sporting goods sales and a 1.2% decline in food and beverage sales dragged the report lower. Overall, sales are now up 1.9% from February’s level but the pace of improvement has slowed significantly.

Homebuilder Confidence, Inventories, Mortgage Applications: The September reports on homebuilder confidence and business inventories are scheduled for 9:00 a.m. CT. In an early-morning release, mortgage applications for the week ending September 11 fell 2.5% on a 0.5% drop in purchase apps and a 3.7% decline in refis.  Mortgage rates remained low with the 30-year rate holding at 3.07%.


YESTERDAY’S TRADING

Global Economic Data Beats Expectations on Tuesday: Despite several upbeat economic reports from major world economies on Tuesday, U.S. equities closed well off their highs for the day as investors awaited today’s afternoon Fed decision. China’s economic recovery continued in August at a more brisk pace than was expected based on the latest release of data covering industrial production, retail sales, and fixed investment. Monthly retail sales were higher compared with last year for the first time in 2020. In Europe, a top survey of financial experts’ outlook for the German economy rose more than expected in September to its highest level in over 20 years, despite a second wave of infections across the continent. And a couple of separate reports showed U.S. manufacturing activity has continued to heal into early September.

Treasury Yields Inched Up: The positive data added to optimism from Monday created by positive developments on the vaccine front, including AstraZeneca restarting its phase 3 trial in the U.K. and other countries outside of the U.S. The major equity averages opened Tuesday stronger amid a global rise is risk assets, but gradually gave up most of those gains in the afternoon. The S&P 500 closed up 0.5% after rising as much as 1.1% early in the session. Financials were the biggest drag with energy shares also declining. Equities drifting lower in the afternoon joined with a solid auction of 20-year bonds to keep a lid on a modest daily rise in yields. The 2-year yield inched up 0.2 bps to 0.14% while the 10-year yield rose 0.7 bps to 0.68%.


OVERNIGHT TRADING

Optimism Checks Up as Investors Await Afternoon Fed Decision: After two days of gains, global equities reflected a bit more caution Wednesday ahead of this morning’s U.S. retail sales report and this afternoon’s highly-anticipated Fed decision. Although national indices were mixed, broader measures of collective results still showed small net improvements for both Asia (+0.5%) and Europe (+0.3%) and U.S. futures were up between 0.2% and 0.5% just before 7 a.m. CT. As investors await the Fed’s refreshed projections for the U.S. recovery, the OECD updated its global outlook to reflect a smaller global contraction in 2020 but a slower pace of recovery. The group’s Secretary General said, “The problem is that this V-shaped recovery is not going to happen, …What we are saying is number one, don’t take away the [fiscal and monetary] support, don’t take away the relief, too fast.” Prior to the U.S. retail sales report, Treasury yields were lower but lagged modestly larger declines across Europe. The 2-year yield was down 0.2 bps while the 10-year yield had dipped 1.0 bp. After the report missed expectations, the 10-year yield moved to down 2.1 bps on the day.


NOTEWORTHY NEWS

Industrial Production Misses Expectations for August but Positive Revisions Show Better Overall Trend: Industrial production rose 0.4% in August and manufacturing activity gained 1.0%, both coming up short of expectations. However, activity in both sectors was revised higher in June and July, leaving the overall three-month trend roughly 0.3% stronger than expected. Overall industrial output was held back by declines in mining and utilities output which offset continued recovery in the manufacturing sector. Most categories of manufacturing output continued to improve, albeit at a slower pace than in July, while transportation production edged lower as auto output pulled back after several months of exceptionally strong recovery. Compared with February, the August gain and positive revisions left total manufacturing output 6.7% below February’s pre-virus level, an improvement from the prior month’s 8% shortfall.


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