The Market Today

Yields Slip Globally on Weak Data

by Craig Dismuke, Dudley Carter

Today’s Calendar – Inflation and Retail Sales Data Disappoint Expectations Dropping Treasury Yields; Bank Earnings Begin:

June’s CPI Report Weaker than Expected, Shows Signs of Stabilizing: Consumer Price Inflation rose more slowly than expected in June with headline prices holding flat MoM and core prices rising just 0.1%.  Both measures missed expectations by 0.1%.  Housing inflation (+3.0% YoY) slowed its growth rate once again on lower prices for household fuels/utilities (+4.4% YoY) and furnishings (-0.6% YoY).  However, rent prices (+3.9% YoY) were a bit stronger than in the May report.  Medical care inflation, another source of price gains which has eased up in 2017, held steady at a 2.7% YoY growth rate.  Recreation, transportation, apparel, and food prices all showed MoM declines, although the declines were smaller than in May’s report (except food prices which gained in May).  While headline inflation fell from 1.9% YoY to 1.6%, core inflation held steady at 1.7% YoY.  It does appear that recent weakening in the inflation data may be easing, but the weakness remains broadly spread.


June’s Retail Sales Data Disappoint Again: Retail Sales for the month of June, once again, disappointed expectations falling 0.2% at the headline level and 0.1% at the core level (-0.2% on an inflation-adjusted basis).  Sales were expected to have increased 0.1% and 0.3%, respectively.  The June report marks the fourth out of the last eight report to report negative MoM core sales (excluding autos, building materials, and gasoline).  In the previous-month revisions, April and May’s data were revised lower as well.   The most prominent weakness came from spending on miscellaneous retail items (-3.1%), food services (-0.6% MoM), sporting goods/hobbies/books (-0.6%), and food and beverages (-0.4%).  In the non-core items, gasoline station sales fell 1.3% on lower gas prices, building material sales rose a healthy 0.5%, and auto sales rose a weak 0.1%.  The weak results give some pause to the idea that the consumer is going to drive growth quite as strongly as expected, despite the strength in numerous consumer indicators.  The data now points to personal consumption rising a weaker-than-expected 1.9% in the 2Q GDP report.


Bank Earnings Beat Estimates: JPMorgan Chase announced better-than-expected results for 2Q as revenues and bottom-line earnings both topped estimates. The bank converted revenues of $26.4B into $1.82 of after tax earnings per share, better than the $1.58 consensus analyst estimate and $1.55 per share from a year-ago. Income from lending activities offset weaker trading results, where activity slowed 19% from a year ago. From an economic perspective, CEO Jamie Dimon said the global economy appeared to be “stable to improving” and pointed to solid activity at its Consumer and Community Banking business segment to show “the U.S. consumer remains healthy”. This stable economic outlook underlies the bank’s updated forecast for core loan growth of 8% in the 2H17 to follow a 9% pace of growth in the 1H17. Citigroup’s quarterly revenue of $17.9B and earnings per share of $1.28 were also better than expected despite a similar slowdown in trading activity. Wells Fargo continued the estimate-topping earnings results but revenues fell short of analysts’ expectations. Divestiture of its insurance services business and a smaller provision for credit losses helped offset the softer revenue.


Overnight Activity – Sovereign Yields Slip: Ahead of this morning’s U.S. bank earnings and June CPI inflation and retail sales data, global sovereign yields fell back as equities inched higher and the Dollar weakened slightly. Treasury yields had dipped around 1 bp across the curve and equity futures were a bit more cautious than the slightly firmer tone abroad. Global economic data showed May’s industrial production was weaker than initially estimated in Japan and the Eurozone’s trade balance was a bit softer than expected in April and May. European sovereign yields led the overnight decline in global yields with analysts pointing to seasonal supply issues and another report on the ECB. After climbing yesterday on a report the ECB could announce at its September meeting a plan to taper its QE program, yields dropped after Reuters reported some at the ECB were hesitant to put a firm end date on net asset purchases. The sources preferred to reduce monthly purchase levels in some form but not say exactly when they would end. Following the disappointing U.S. economic data, Treasury yields moved quickly to their lows of the day with the 2-year yield down 3.2 bps to 1.33%, the 5-year down 5.0 bps to 1.84%, and the 10-year off 4.6 bps to 2.30%. The Dollar tumbled to its weakest level since September of last year.


Yesterday’s Trading Activity – Another Good Day for Equities adds to Early-Morning Pressure for Treasury Yields: The Dow gained (+0.1%) for a third consecutive day and closed at a new record high for the second time this week. The S&P and Nasdaq both added 0.2% but fell short of notching a new record. Treasury yields rose 2.0 bps and 2.7 bps at the 2- and 10-year parts of the curve, respectively, as sovereign debt extended an early morning sell-off. Sovereign yields came under (upward) pressure after a pre-market report in the WSJ indicated the ECB may announce tapering of its QE program at its September meeting. This follows recent indications that the ECB may be turning less dovish on monetary policy. The Euro, however, failed to rally on the report and weakened for a second day against the Dollar after reaching its strongest level against the greenback in 14 months on Tuesday.


Vining Sparks 3Q Economic Outlook Webinar: Vining Sparks hosted our 3Q economic outlook webinar Thursday at 10 a.m. CT. The webinar, entitled The Moderation of Great Expectations, covered five primary topics: 1) an update on economic developments in the U.S. this year, 2) an overview of diminished expectations from fiscal policymakers, 3) the transformation of a blindly dovish to a blindly hawkish FOMC, 4) the impact of evolving monetary policies outside the U.S., and 5) the implications for interest rates for the remainder of the year. Click here to watch the replay or click here for a copy of the slides.


Senate Offers Amendments to Original Health Care Proposal: The Senate leadership released an amended health care bill Thursday with sweeteners for both ends of the Republican party spectrum in hopes to circle more support around the health care reform wagon. To bring back support from some more moderate Republicans, the amended bill added back certain taxes on high-income Americans and provided for an additional $70B of federal funds to states to offset premium costs and $45B to help address opioid addiction. For the most conservative Senators, the bill kept the cuts to Medicaid in the original version and added a provision that would allow insurers to sell non-compliant plans (i.e. catastrophic insurance plans) as long as they also offer plans that do comply with the laws required parameters. Funds socked away in individuals’ HSA accounts would also now be allowed to pay for insurance premiums. Reports are that the CBO hopes to have the bill scored early next week which would potentially allow the Senate to hold a vote by next Friday as Senator McConnell has indicated he hopes to do.


Yellen Says Premature to Conclude Inflation Trend Is Falling Short (WSJ): According to a WSJ report, “Federal Reserve Chairwoman Janet Yellen said Thursday a strong labor market and rising prices of imported goods supported her expectation that a recent downturn in inflation would prove transitory. In raising interest rates last month and penciling in one more increase later this year, Fed officials have so far looked past recent soft inflation readings by pointing to several idiosyncratic price declines, such as for wireless phone plans. Ms. Yellen cited those factors again in testimony to the Senate Banking Committee on Thursday, but also nodded to inherent uncertainty in near-term inflation figures. ‘There may be more going on. We’re watching inflation very carefully in light of low readings,’ she said. ‘I think it’s premature to conclude that the underlying inflation trend is falling well short of 2%. I haven’t reached such a conclusion.’”

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