The Market Today

TODAY’S CALENDAR

April Retail Sales Show No Rebound from Consumer: Retail sales for the month of April disappointed economists’ expectations, falling 0.2% MoM at the headline level despite a 1.8% increase in gasoline sales.  Building material sales fell 1.9% and auto sales dropped 1.1%.  Apart from those bigger ticket categories, core retail sales fell 0.03% MoM in April.  This data does not point to an imminent rebound in consumer activity and will only further entrench the Fed in its commitment to patience.  In fact, if the recent run of weak data and increased global turmoil continues, the Fed may be forced into considering a rate cut.

Empire Manufacturing Report Disappoints Beneath the Headline: The New York Fed’s Empire Manufacturing index headline figure beat expectations, rising from 10.1 to 17.8 on a big jump in shipments and a smaller increase in new orders.  The new orders index rose from 7.5 to 9.7, slowly gaining back lost ground from mid-2017 to 2018, when the index averaged 17.3. The remainder of the report was less encouraging with the inventory index down, number-of-employees index down, and the average-employee-workweek index basically unchanged.  While the report on activity in the New York Fed region is only one indicator for the ISM manufacturing index, it points to the broader index falling 1.6 points in May. 

Manufacturing Output, Homebuilder Confidence, Inventories, and Fedspeak: At 8:15 a.m. CT, the industrial production and capacity utilization reports are expected to show manufacturing output unchanged in April.  At 9:00 a.m., the May homebuilder confidence index is expected to show a slight uptick in sentiment from a sector benefiting from the recent drop in interest rates.  Also at 9:00 a.m., the March business inventories report will help sharpen the pencil on 1Q inventory accumulation which has already been estimated to have been a material boost to 1Q GDP growth.  Additionally, Fed Vice Chair Quarles will testify before the Senate Banking Panel at 8:30 a.m. this morning while Richmond Fed Bank President Barkin is slated to speak in New York at 11:00 a.m.

TRADING ACTIVITY

Overnight – Weak China Data, Noise in Europe, U.S. Retail Sales Miss All Weigh on Yields: Global equity markets have moved in opposite directions overnight while core sovereign yields were exclusively lower as investors awaited today’s busy U.S. economic calendar. China’s CSI 300 posted a counterintuitive 2.3% gain and was the clear global outperformer on Monday, even as several key economic reports falling well short of estimates. Fixed investment weakened unexpectedly in April. Industrial production slowed from 8.5% YoY to 5.4%, worse than the 6.5% gain expected and one of the weaker readings on record. And retail sales were up just 7.2%, short of the 8.6% gain expected and the second weakest YoY gain since the late 1990s. The across-the-board misses increased the likelihood that the government will quicken its provision of more stimulus for the economy. Related, and likely to catch the attention of the White House, China’s central bank weakened the yuan for a fifth day to a new low for the year. The 1.6% decline over the last five sessions is the steepest five-day decline in almost 10 months. In Europe, there were mixed headlines that kept the Stoxx 600 down 0.3% and core bond yields notably lower. Italian yields popped after its government said the deficit could breach EU limits while the U.K 10-year yield slipped 6.2 bps after the Brexit Secretary warned the risk of a no-deal Brexit is being underestimated. Germany’s 10-year yield was dragged 5.0 bps lower to -0.12%, a new low since September 2016, despite a preliminary estimate showing its economy grew 0.4% in 1Q to break to snap a disappointing second half of 2018 (-0.2% 3Q, 0.0% 4Q). Before this morning’s U.S. data, the Treasury curve had shifted down more than 3 bps, pushing the 2-year yield to a new low since February 2018 and the 10-year yield to its lowest level since 2017. The downside move in yield intensified after April’s disappointing retail sales were released.

Yesterday’s Trading: Yields Fractionally Higher as Stocks Rebound from Ugly Monday: Treasury yields inched upward yesterday as stocks partially rebounded from Monday’s drop.  President Trump’s opening salvo of tweets yesterday morning implicitly signaled that negotiations were still possible with China and, less importantly, that the president still preferred easier monetary policy from the Fed to “match” potential easing from China. After fears that trade negotiations had hit an impasse pushed stocks down 2.4% on Monday, the DJIA rose 1.2% by midday yesterday before ending the day up 0.6%. The 10-year Treasury yield rose 0.9 bp to 2.410% while the 2-year yield rose 1.5 bp to 2.197%.  West Texas crude rose 1.3%, the Dollar gained 0.2%, and gold dropped 0.5% as sentiment was generally less negative.  Nonetheless, Chinese officials ratcheted up the internal rhetoric yesterday.  The People’s Daily, the flagship newspaper of the communist party, published an article saying that U.S. leaders are only hurting their own people with the newly announced tariffs.  Without naming President Trump, the article specifically quotes four of his tweets saying that he is creating victory out of thin air. The signs of détente are few and far between at this point.

NOTEWORTHY NEWS

Mortgage Delinquencies Rise Unconvincingly: Mortgage delinquencies rose 0.36% in 1Q driven by a 29 basis point increase in newly delinquent loans and a 7 basis point increase in 60-to-90-day-delinquent loans (see Chart of the Day). While the number of newly delinquent loans did tick higher, overall delinquencies remain at a low level historically.  Looking into the data by state, the year-over-year trends show the largest increases generally in non-coastal states: Nebraska (+0.26% OYA), Maryland (+0.25%), Minnesota (+0.23%), Arizona (+0.23%), Arkansas (+0.21%), South Dakota (+0.21%), South Carolina (+0.21%), and Virginia (+0.21%).

Kansas City’s George More Worried about Asset Bubbles than Soft Inflation: Kansas City Fed Bank President Esther George is more concerned about asset bubbles than below-target inflation, saying yesterday that she does not favor a rate cut to push inflation higher.  George highlighted the risk of a rate cut, saying “Lower interest rates might fuel asset price bubbles, create financial imbalances, and ultimately a recession.”  She dismissed the concern of chronically below target inflation, saying “with an unemployment rate well below its projected longer-run level, I see little reason to be concerned about inflation running a bit below its longer-run objective.”  George is a voting member this year and is arguably the most hawkish FOMC member.