The Market Today

Trade Talks Turn Softer; Retail Sales Blowout


by Craig Dismuke, Dudley Carter

Consumers Continue Holding It All Together: Consumers appear unaware of the uncertainty plaguing markets, continuing to spend at an impressive pace according to the July retail sales data.  Retail sales rose 0.7% for the month, well above the expected 0.3% growth.  Higher gasoline prices accounted for some of the strength, up 1.8% MoM as gasoline usage apparently surged (gas prices only rose from an average of $3.05 to $3.07 from June to July).  Auto sales were disappointing, down 0.6% MoM but building material sales rose 0.2%.  Core sales; excluding these gasoline, autos, and building materials; jumped 1.0% and continued a run of exceptionally strong reports in 2019.  For the year, core sales are averaging 0.6% gains MoM.  The 3M/3M annualized momentum indicator is now up to 9.7%, only surpassed during this cycle by the May tally. Furniture, electronics and appliances, food and beverage, restaurants, clothing, general merchandise, and online retailers all saw strong results in July.  For the quarter, the report (only one month) points to personal consumption rising 2.0% even after 2Q’s exceptional 4.3% gain.


Fed Surveys Show Sentiment Held Up Better than Expected in Face of Increased Trade Anxieties: In addition to the surprisingly solid retail sales report, a pair of regional Fed surveys showed sentiment held up better than expected in the face of escalating trade tensions. The Empire Manufacturing report rose unexpectedly from 4.3 to 4.8 in August, avoiding the modest decline to 2.0 that economists had expected. The details showed new orders and shipments, key gauges of economic activity in the regions, both firmed up from July while employment changes moved in opposite direction. The employment index improved, but remained negative, as the workweek shortened. Looking ahead, capital expenditure plans for the next six months improved amid mixed shifts in other metrics, leaving overall expectations for business activity a bit softer and at one of its weaker readings from the last several years. In the report from the Philadelphia Fed, the current assessment slipped less than expected, from 21.8 to 16.8, as stronger new orders offset softer shipments and weaker employment indicators. The outlook over the next six months was relatively stable. The two Fed surveys, which should capture a portion of the recent trade escalation since July, signal resiliency in the face of uncertainty.


Productivity Inches Higher: Nonfarm productivity posted a stellar 3.2% gain in 2Q, well above expectations for a 1.4% increase.  Productivity does appear to be inching higher, albeit at a very slow pace.  The average rate of productivity growth since the recession ended remains 1.0%.  However, the average since 2017 is now up to 1.5% and the average since 2018 is up to 1.6%.


Jobless Claims Remain Low: Initial jobless claims for the week ending August 10 rose 9k to 220k.


Manufacturing Activity and Homebuilder Confidence: At 8:15 a.m. CT, the July Industrial Production report is expected to show a 0.1% increase in total output, but a 0.3% decline in manufacturing output.  Unlike the two Fed surveys released this morning, July’s Industrial Production report likely will not reflect any implications from the latest tariff threats. Manufacturing output has contracted for two consecutive quarters and appears that it will continue to struggle amidst slowing global trade.  Homebuilder confidence is slated for 9:00 a.m. CT and is expected to remain strong.


TRADING ACTIVITY

Yesterday – Curve Inversion Sinks Equities and Sparks Fear of Growing Recession Risks: Investors’ recession fears worsened Wednesday as a bout of weak global data offset the optimism of Tuesday’s tariff delay, resulting in a key portion of the Treasury curve inverting for the first time since 2007. Stocks initially jumped during Asian trading, but quickly turned lower and deteriorated throughout the U.S. session. In a timely sign of the continued stresses from the trade war, data showed Chinese industrial production slowed to its weakest pace in 17 years in July and retail sales came up well short of estimates. While expected, data showed Germany’s economy contracted 0.1% in the second quarter, further evidence that the spat between the U.S. and China has rippled beyond those countries’ borders. Weakness in stocks picked up at the open of European trading, as did the flight to quality into sovereign assets. Around 5 a.m. CT, that bid for safety pushed the 10-year yield below the 2-year yield for the first time since 2007, a milestone that accelerated the move out of risky assets. Seen as a reliable indicator of a turn in an economic cycle, the inversion messaging was heard loud and clear by investors anxious about their U.S. equity holdings. The S&P 500 dumped 2.8% in a sell-off that punished even the safest of sectors, while the Dow dropped an even-larger 3.1% to close below its 200-day moving average. The strength of the bid for Treasurys pushed the 2-year yield down 8.9 bps by the close to 1.577% while the 10-year yield dropped 12.4 bps to 1.579%, a new low since September 2016. After inverting earlier in the day, the spread between the two closed at a positive 0.002%. The 30-year Long Bond closed down 14.5 bps at a record low 2.02%. Elsewhere, crude prices crumbled, gold inched up to a new high back to April 2013, and the safe haven yen surged.


Overnight – Curve Inversion Causes Hypersensitive Markets to Swing Sharply on Trade Headlines: Global equities remained volatile Thursday and Treasury yields drifted even lower as investors digested new trade headlines against the backdrop of yesterday’s inversion of a critical portion of the U.S. yield curve. Europe’s Stoxx 600 tumbled sharply into negative territory around 4 a.m. CT and U.S. futures gave up overnight gains on a statement from China’s State Council Tariff Committee. Seemingly unsatisfied by this week’s delay of a portion of the tariffs until December 15, the statement said the U.S.’s 10% tariff planned for an additional $300B of goods broke the agreement between the two presidents at the G-20 in Japan. The statement went on to say that China “has no choice but to take necessary measures to retaliate.” Treasury yields reversed lower with equities and the 2-year/10-year spread briefly reentered inversion. The 10-year yield fell as low as 1.512% amid the drop, the lowest intraday level since August 2016, while the 30-year U.S. Bond broke below 2% for the first time ever. Those moves were matched by new record low yields of -0.67% and -0.23% on German 10- and 30-year debt. However, global equities recovered and Treasury yields moved off their lows on a stronger earnings report from Walmart and subsequent trade headlines out of China. China’s foreign ministry said it hoped the U.S. would meet China halfway in negotiations and disclosed that the countries’ presidents “have remained in contact with each other via meetings, phone calls and letters.” After turning a 0.8% gain into a 0.9% loss, Dow futures were back up 0.6%, all before this morning’s bustling U.S. economic calendar.


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