The Market Today

Virus Weighs on Europe and U.K.; U.S. Retail Sales Firmer Than Expected in July


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE

VS Coronavirus Chartbook (PDF) (Link)

Monitoring the Virus Headlines: In another light day for virus developments, Dr. Fauci became the latest prominent health official to throw cold water on Russia’s claim to the world’s first vaccine for the coronavirus. The White House medical adviser said he has serious doubts about whether Russia implemented sufficient testing to prove that its shot is safe. In more reliable medical news, Oxford and AstraZeneca said they expect to start human trials for its vaccine in the U.S. later this month. As for pandemic developments in key U.S. states, California reported below-average cases and hospitalization and ICU numbers that were the lowest since June. Texas’s governor said the recent spike in positive test rates was being investigated. Globally, the recent increase in cases in some European countries who had successfully bent the curve continued, although infection levels remained well below previous peaks. Those trends led the U.K. to announced it was adding France to its mandatory quarantine list.

 

TODAY’S CALENDAR

Retail Sales Slow Gains, Return to More Normal Spending Patterns in July: Headline retail sales rose 1.3% in July after an 8.4% gain in June (revised up from 7.5%), a weaker-than-expected gain on a disappointing month in auto sales.  Excluding autos and gasoline, sales rose 1.5% versus expectations for a 1.0% gain.  In addition, June’s results excluding autos and gasoline were revised up from +6.7% to +7.7%.  After the positive June revision, headline retail sales officially cleared their pre-virus level in June and are now 1.7% above February’s level.  Core sales are now up 4.9% versus February’s pre-virus level.  At a sector level, some of the areas of strength were softer in July: motor vehicle and parts sales declined 1.2%, building material sales fell 2.9%, food and beverage sales rose just 0.2%, and online sales rose just 0.7%.  In contrast, some of the areas that saw significant lost activity initially improved in July: restaurant sales rose 5.0%, electronics and appliances sales rose 22.9%, clothing and accessories sales gained 5.7%.  While these areas remain below their pre-virus levels, the lost ground continues to be recovered. Overall, retail sales proved firmer than expected in July, good news after some of the faster data turned soft during the month.

Manufacturing Output, Business Inventories, Consumer Confidence, Fedspeak: At 9:00 a.m. CT, the July Industrial Production report is expected to show a 3.0% recovery of activity including a 3.0% gain in manufacturing output.  Business inventories are expected to show a 1.1% decline in June and the University of Michigan’s initial read on consumer confidence in August is expected to be soft. Dallas Fed Bank President Kaplan is scheduled to speak today, also at 9:00 a.m.


YESTERDAY’S TRADING

S&P Failed to Hold Record Gain for Second Day: The S&P 500 crossed above February’s all-time closing high for a second day on Thursday, but again failed to hold the gain through to the close. Sentiment strengthened initially after jobless claims fell below 1 million for the first time since March. The index slipped back into negative territory after lunch, however, and finished down 0.2% for the day. Energy companies fell the most on a percentage basis as crude came off one of its best levels since early March after the International Energy Agency lowered its outlook for global oil demand. The weakness hit other sectors too, with all but tech-related companies losing ground on the day. Tech’s resiliency kept the Nasdaq positive but plunging shares of Cisco capped the gain. The company’s stock collapsed more than 11% after its guidance for the current quarter missed expectations.

Treasury Yields Shot Higher after 30-Year Tailed in Weak Auction: As equities fluctuated, Treasury yields rose and fell but finished higher after a record auction of $26 billion in 30-year Treasury Bonds tailed by more than 2 bps, a sign of weak demand. Longer yields shot higher as those results were released and held those increases for the remainder of the afternoon. The Long Bond jumped a session-leading 5.4 bps to 1.43% and the 5-year yield added 1.8 bps to 0.32%. The spread between the two securities widened out to 110.5 bps, the most since early July. The 2-year yield edged up 0.2 bps to 0.16% while the 10-year yield rose 3.6 bps to 0.72%, the highest since mid-June. The popular 2-year, 10-year spread expanded to 55.6 bps, the widest since early June.


OVERNIGHT TRADING

Uncertainty Stalls Global Equities Which Had Climbed Back Near Records: A week of uncertainty appears set for an appropriate finish on Friday as global markets continued their cautionary market fluctuations in front of the highly-anticipated results for U.S. retail sales in July. Consumer spending was also a focus in China after a surprise drop in retail sales in the world’s second largest economy in July cast a shadow over the country’s economic recovery. The 1.1% YoY decline represented a fourth-consecutive improvement since the worst levels of the pandemic but fell short of economists’ expectations for a small 0.1% gain. The 4.8% gain for industrial production also disappointed while a 3.4% improvement in investment edged out expectations. While Chinese equities still managed gains for the day, the rest of Asia closed mostly lower creating a weak handoff for Europe.

Treasury Yields Edge Lower as European Equities Sink: Europe’s Stoxx 600 slid immediately from the open and remained down 1.2% at 7:15 a.m. CT despite a marginal recovery from its lowest point. While the current levels remain well below their previous peaks, rising new virus cases in some European countries that had succeeded in bending the curve has begun to stir some concern. The trends also led the U.K. to announce on Thursday new mandatory 14-day quarantine measures for citizens when they return from travel to several European countries, including France. The quarantine list already included Spain, Portugal, and Belgium. Airline stocks were some of the hardest hit in Europe, although all 12 sectors were in the red. Just before the retail sales data were released, S&P 500 futures were essentially flat while Nasdaq contracts had gained 0.3%. The 2-year yield was 0.8 bps lower while the 10-year yield had pulled back 1.6 bps. There wasn’t much of a response to the marginally better-than-expected core retail sales results.


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