The Market Today
Retail Sales Waiting for Tax Refunds
by Craig Dismuke, Dudley Carter
Retail Sales Waiting for Tax Refunds: February’s Retail Sales report showed a third consecutive month of declining sales, falling 0.1% MoM versus expectations of a 0.3% increase. However, January’s data were revised higher making the report only fractionally weaker-than-expected. For February, gasoline station sales fell 1.2% MoM on lower gas prices, auto sales dropped another 0.9% MoM (4th consecutive decline), but building material sales rebounded 1.9% after falling 1.8% in January. We remain concerned about the direction of auto sales, save for a few-month jump following the hurricanes in the fall. In contrast, we are encouraged by the strength in the building material sales data particularly after the blowout construction sector job gains reported in last Friday’s payroll report. Excluding these volatile items, core sales rose 0.1% while January’s report was revised up from -0.2% to +0.0%. Clothing, sporting goods, and non-store retailers were the only categories showing above-trend growth in February. The 1Q retail sales data, cumulatively, points to really weak consumption for the 1Q GDP report. However, there has reportedly been a delay in tax refunds, specifically for taxpayers claiming the Earned Income Tax Credit or the Additional Child Tax Credit. As such, we continue to expect to see the fruit of more disposable income begin to show up in the March data, and are not concerned about the weak start to 2018.
Producer Prices Continue to Show Building Inflation Pressure: February’s Producer Price report showed more inflation pressure on the production side with headline PPI rising 0.2% MoM (stronger-than-expected) and core prices also rising 0.2% MoM (in-line with expectations). At the core level, producer prices are now up 2.7% YoY, the fastest level since 2014. Price pressure appears to be gaining more traction on the services side. This is one of the factors officials are relying upon as they expect core PCE inflation to move back toward their 2% target this year.
Yesterday – Equity Investors Faded an Initial CPI Boost: Stocks received a brief boost from the as-expected February CPI inflation report that faded quickly as tech companies led a loss of support for the broader market. The absence of another firmer-than-expected CPI surprise likely calmed fears that the Fed may be forced into four or five catch-up hikes in 2018 after years of priming the pump with emergency-level interest rates. The S&P 500 jumped as much as 0.7% in the first half hour but turned negative just before lunch, ending down 0.6% and near its daily low. Technology companies led the broad-based decline that saw 8 of 11 sectors lose value. Tech’s underperformance pushed the Nasdaq down a day’s-worst 1.0%. The Treasury curve reached its low point shortly after the CPI release, recovered briefly to flat for the day, but ultimately reverted back to close near the lows. The 2-year yield dropped 0.8 bps to 2.25%, the 5-year yield shed 1.7 bps to 2.62%, and the 10-year yield fell 2.6 bps to 2.84%. Those points of the curve continue to consolidate within roughly one-month-long trading ranges.
Overnight – Stock Sentiment Recovers in Europe: Yesterday’s U.S. losses served as only a temporary global distraction Wednesday, as early equity weakness in Asia gave way to modestly stronger trends across Europe. The MSCI Asia Pacific Index dropped 0.4% while the Stoxx Europe 600 has so far traded up by roughly that same amount. Miners are helping lead the broad-based gains and likely getting a boost from positive data out of Asia. China reported almost-in-line retail sales data and industrial production and fixed investment results that easily cleared estimates. The Euro has slipped against every major currency after ECB President Draghi doubled down on his dovish tone from last week’s post-meeting press conference. Draghi said Wednesday that “monetary policy will remain patient, persistent and prudent” and noted a “very clear condition for us to bring net asset purchases to an end: we need to see a sustained adjustment in the path of inflation.” Despite his tone, yields in Europe have slowly inched higher after a weak German auction and helped nudge Treasury yields up from yesterday’s levels. Before this morning’s retail sales report, the 2-year yield was 1.2 bps higher with the 10-year yield up a smaller 0.2 bps.
No-Volume Day for Japanese 10-Year Bonds: From a Wednesday Bloomberg piece, “Some jobs might be threatened by automation. But when it comes to government bond trading in Japan, the biggest threat might be the country’s central bank. The Bank of Japan has vacuumed up so much of the government bond market — in excess of 40 percent — that it’s left fewer securities for others to buy and sell. Some other buyers, such as pension funds and life insurers, also tend to follow buy-and-hold strategies. That’s the backdrop to Tuesday’s session, when not a single benchmark 10-year note was traded on exchange, according to Japan Trading Co. data. Barclays Securities Japan rates strategist Naoya Oshikubo, summed it up, with perhaps an understatement: ‘the JGB market was generally thin.’”