The Market Today

Surprisingly Strong Retail Sales Complicates the Market’s Expectation for Steep Rate Cuts

by Craig Dismuke, Dudley Carter


Surprisingly Strong Retail Sales Complicates the Market’s Expectation for Steep Rate Cuts: Total retail sales came up 0.1% short of estimates in May while each of the other subgroupings edged out expectations by 0.1%. Total sales, sales excluding autos, sales excluding autos and gasoline, and sales in the control group categories which feed directly to the GDP report all rose 0.5% in May. The monthly gains were made even more impressive by sizeable positive revisions to April’s advanced estimate which places the 2Q trend tracking on a much better trajectory. Despite a 0.3% increase in gasoline sales, 11 of 13 categories experience stronger sales activity in May. Making the largest contributions to the increased spending, auto sales extended a volatile run with a 0.7% increase and online sales picked up 1.4%, their best month since January. Except for spending on food and drink and activity at miscellaneous retailer, two categories that account for roughly 14% of total activity, the remaining 11 categories were as good or better than their 12 month averages. With May’s improvement and April’s upward revision, personal consumption is tracking back above 2% for the second quarter. While inflation could be the key determinant of policy in the weeks and months ahead, this morning’s retail sales report complicates the market’s expectation for steep rate cuts from the Fed. Despite data showing that global uncertainty is weighing on business activity and potentially starting to have an effect on the labor market, consumer spending tracking strongly in the second quarter indicates it has yet to weaken the most heavily-weighted component of U.S. growth.


Later Today: At 8:15 a.m. CT, data from the Federal Reserve is expected to show recoveries of 0.2% and 0.1% for industrial production and manufacturing, respectively, after both slumped 0.5% in April. At 9 a.m. CT, the University of Michigan will release its preliminary estimate of consumer sentiment for June, the first month that could fully capture the escalation of trade tensions in May, which is expected to show a modest pullback for confidence on moderation in both the current assessment and future expectations. The Census Bureau will report at 9 a.m. CT how much business inventories grew in April, with economists expecting a 0.5% gain.



Yesterday – Stocks Rallied with Crude as Treasury Yields Declined: U.S. stocks broke out of a two-day slump Thursday, sending the S&P 500 up 0.4% in rally led by U.S. energy companies. Crude prices had jumped overnight on reports that two tankers had been attacked in the Strait of Hormuz, causing concern about escalating tensions in the Middle East. Shortly after lunch, U.S. Secretary of State Pompeo gave a statement blaming Iran, saying “The international community condemns Iran’s assault on the freedom of navigation and the targeting of innocent civilians.” After rising as much as 4.5% just before the U.S. session, WTI closed up 2.5%. Energy companies within the S&P 500 rose 1.3% to lead a broad-based day of improvement for most sectors. Health care companies dipped 0.1%, the only sector to finish lower on the day. Despite stronger equities and firmer oil, Treasurys remained well-bid throughout Thursday’s trading. A strong auction of 30-year Treasury bonds helped, stopping through by 0.4 bps with a better bid-to-cover and direct bidders taking more than their normal share from primary dealers. The 2-year yield dropped 4.3 bps to 1.84%, less than 1 bp from the lowest level since December 2017. Euro Dollar and Fed Funds futures both strengthened expectations for Fed easing, with the latter now pricing in 70 bps of easing by the end of the year. The 5-year yield fell 3.3 bps to 1.84% while the 10-year yield finished down 2.6 bps to 2.09%.


Overnight – Global Yields Retreat as Investors Receive Weak China Data, Await U.S. Retail Sales: Global equities have weakened overnight and sovereign yields declined after China data missed and before an update on U.S. consumer spending. China’s industrial production rose 5.0% in May from a year ago, short of the 5.4% gain economists expected and the weakest month for output in 17 years. Fixed investment also came up short of consensus while retail sales printed better than expected. The weaker industrial data confirmed trade tensions are weighing on the world’s second largest economy and dragged Chinese stocks down 0.8%. European markets pulled back by similar amounts and U.S. equity futures had declined, both being led lower by the technology sector. Oil prices dipped despite geopolitical tensions in the Middle East being stoked by yesterday’s tanker attack. Amid the equity weakness and against a backdrop of uncertainty around trade and geopolitics, sovereign yields fell. Yields on 10-year debt of France and Germany fell more than 2 bps to 0.08% and -0.27%, respectively, both reaching new all-time lows. Treasury yields fell even more before the retail sales report, with the 2- and 10-year yields earlier down around 3 bps and back near their lowest levels since 2017. A surprisingly strong reading on the consumer, which complicates the outlook for Fed policy, sent yields surging higher, pushing the 2-year yield up 1.8 bps on the day, a nearly 7 bps swing from the overnight low.


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