The Market Today
Valentine’s Day Disappointment for Retail Sales
by Craig Dismuke, Dudley Carter
Coronavirus Update: The number of confirmed cases rose 5,090 in China’s N.H.C. reporting, although the overall tally only increased 4,045 as previously reported cases were reduced after verification. The total number of confirmed cases globally is now 64,450. There were 121 new deaths reported but 108 previously reported deaths were determined to have been double counted. As such, the death toll rose just 13 to 1,380. The confirmation methodology continues cloud the assessment of if the virus is spreading more rapidly or not. It appears that the rate of infection has begun to slow and the case fatality rate has moved back down closer to 2%. To see our updated Coronavirus Chartbooks, please click here.
Valentine’s Day Disappointment for Retail Sales Data: January’s retail sales disappointed expectations with no gain in core sales for the month and negative revisions to the November and December reports. November’s core sales were revised down from -0.1% to -0.2% and December’s were revised down from +0.5% to +0.2%. As for January, headline sales rose 0.26% in January on a 0.17% increase in autos and a huge 2.06% gain in building materials. Gasoline sales fell 0.5% on lower gas prices. This left core sales unchanged. Helping drag down the core total, clothing sales fell 3.1%, its largest monthly decline since 2009. While the sales data points to continued strength in the construction sector, the remainder of the report showed that the December uptick in consumer activity might have been short-lived. Core retail sales are now down 0.3% on a level basis since last August. This will certainly give cause for concern as consumption does not generally plateau like this during an economic expansion (see Chart of the Day).
Busy calendar – Manufacturing Output and Consumer Confidence: At 8:15 a.m. CT, the January Industrial production report will show the latest read on manufacturing activity. At 9:00 a.m., December’s business inventories report is expected to show a slight gain. And, also at 9:00 a.m., the University of Michigan’s first look at consumer confidence in February is expected to show a slight pullback after a strong January report.
Spike in Confirmed Cases Caused Market Rethink: China’s virus case count spiked Thursday after the government announced that clinically-diagnosed patients will now also be counted as confirmed cases. Prior to the change, confirmed cases were contingent on a positive lab test that showed a patient had the virus. The change resulted in a more than 15,000-case increase, the largest on a percentage basis since the early days of the outbreak, and was reported alongside a more than 20% increase in the number of virus deaths to 1,370. Global markets quickly flipped into risk-off mode after the statistics were announced, with equity markets falling across Asia and Europe, U.S. futures weakening, and global sovereign yields declining with oil prices. After dropping 0.6% at the open, however, the S&P 500 staged a morning comeback as nerves calmed.
Nerves Calmed on Hopes the Adjustment Was a Catch-Up, Not Reacceleration: Most had already discounted the fact that the number of cases was likely underreported. Early in the U.S. session, an official from the World Health Organization said, “Most of these cases relate to a period going back over days and weeks, in some cases back to beginning out of the outbreak itself.” With investors hoping that Thursday’s spike represented a catch-up adjustment as opposed to a reacceleration of new cases, stocks briefly turned positive in the afternoon. However, a headline that indicated the Fed was reducing the amount of its repo offerings starting today pulled stocks back down into the close. The S&P 500 ultimately ended down 0.2%. Treasury yields, helped out by higher yields in the U.K., trimmed overnight declines to post a modest drop. The 2-year yield ended unchanged at 1.44% while the 10-year yield closed down 1.2 bps at 1.62%.
Stocks Balance Uncertainty and Optimism As Cases Keep Climbing: Uncertainty remained evident in global market trends on Friday after yesterday’s reporting change in China led to a spike in confirmed cases, reigniting worries about the virus’s effect on the global economy. The number of new cases in China rose more than 5,000 overnight, split nearly 60/40 between those clinically diagnosed (the new method of confirmation) and those confirmed by a lab test. Equities were pointing in different directions and Treasury yields had moved lower with global yields. However, signs of cautious optimism also lingered. Shares in Japan fell but stocks rose across China and South Korea. Most indices in Europe opened weaker but have since recovered to lift the Stoxx 600 0.2% to a new all-time high. Oil prices were also positive and near a two-week high.
Low-Rate Expectations Continue to Cushion Coronavirus Fears: Consistent with the belief that expectations for easing from fiscal and monetary policymakers are supporting equities to a degree, global yields remained lower. Treasury yields edged back ahead of an influx of economic data this morning, with the 2-year yield down 1.8 bps to 1.43% at 7 a.m. CT and the 10-year yield 2.4 bps lower at 1.59%. The Dollar inched up to continue its torrid run that has taken the currency to a four-month high and helped drag the Euro to near a three-year low. Data released on Friday showed that Germany’s economy stalled in the fourth quarter even before the virus outbreak, and that activity in the Eurozone as a whole rose just 0.1%. The soft close to 2019 left the YoY rate of growth at just 0.9%, the weakest since 2013. After the disappointing retail sales results, the 2-year yield dropped to down 2.8 bps on the day, the 10-year yield increased its decline to 4.1 bps, and equity futures fell back close to unchanged.