The Market Today

Strong Retail Sales Report Decreases Likelihood of 50 Basis Point Cut

by Craig Dismuke, Dudley Carter


Strong Retail Sales Report Decreases Likelihood of 50 Basis Point Cut: June’s retail sales report proved better than expected, keeping the narrative in place that the consumer is lifting the U.S. economy while manufacturing and business investment are tempered by the uncertainty of trade policy.  Headline sales rose 0.4% MoM versus expectations of a 0.2% increase.  The headline figure was particularly strong when taking into account the 2.8% drop in gasoline sales during the month.  Building material sales rose 0.5%, outpacing the 3-month average by more than a full percent.  Auto sales jumped 0.7% MoM.  Excluding those more volatile categories, sales rose a solid 0.7% which, along with positive revision to previous months’ data, point to the strongest quarter for consumption since 2014.  Every category of sales beat their 12-month trend rates with the lone exception of gasoline stations.  This result is likely to limit the likelihood of the Fed cutting 50 basis points in coming meetings, although that possibility remains if global growth continues to struggle and trade policy isn’t solidified.


Manufacturing Output, Homebuilder Confidence, Inventories: At 8:15 a.m. CT, the June Industrial Production report is expected to show manufacturing activity increase 0.3% MoM.  Manufacturing has been ground zero for the impact of trade uncertainty, with output disappointing for the majority of the year.  At 9:00 a.m., homebuilder confidence is expected to remain solid despite the continued weakness in new home sales.  At the same time, the business inventory report is expected to show a 0.3% increase in June inventories.


Fed Speakers Have Last Week to Fine-Tune Message Heading into Quiet Period: Atlanta Fed Bank President Bostic is moderating a panel this morning while new Fed Governor Michelle Bowman is making introductory remarks at a Fed Listens event.  At 11:20 a.m. CT, Dallas Fed Bank President Kaplan is slated to speak at the NABE conference in Washington.  Kaplan has not made public comments since the wave of communications last week.  Three weeks ago, he stated that it was too early to make a call on the appropriate path for policy.  At 12:00 p.m., Fed Chair Powell will speak from a conference in Paris.   Finally, Chicago Fed Bank President Evans will speak at 2:30 p.m.  If Fed officials are unhappy with the message received by markets last week, they will have plenty of opportunity this week to change that message prior to the pre-FOMC quiet period.



Overnight – A Key Consumer Update as Corporate Earnings Season Gets Under Way: Global equities are mixed and modestly changed overnight, a day after U.S. equities edged out a new round of records. The global corporate earnings season kicks off in earnest this week against a backdrop of restarted U.S.-China trade talks and expectations for easier monetary policy from the world’s major central banks. Those are likely to be key topics discussed by executives during earnings calls in the comings weeks, with investors anxious to hear how the economic dynamics are being viewed in C-suites across the country. Trade tensions have been blamed as the primary culprit behind weaker global economic activity and the resumption of negotiations is a net positive for the forecast horizon. However, the outlook remains mired with uncertainty. On Monday, President Trump cited in a tweet China’s just-released GDP print, the weakest in nearly three decades, as the reason why “China wants to make a deal,” but seemed content that “In the meantime, we are receiving Billions of Dollars in Tariffs.” Ahead of this morning’s retail sales data, JPMorgan pointed to a healthy consumer as a reason for its better-than-expected earnings result, but highlighted “slightly higher global macroeconomic and geopolitical uncertainties” as a headwind for certain commercial lines of business. On those fronts, Treasury yields were modestly higher heading into the U.S. retail sales report despite European yields moving lower after a key German economic expectations index fell more than expected back to near its lowest levels since 2011. Treasury yields, which were less than 1 bp changed before the consumer report, spiked higher as sales beat estimates to further complicate the Fed’s outlook, pushing the 2-year yield up 3.3 bps to 1.86% and the 10-year yield 2.1 bps higher to 2.11%.


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