Not so fast. Stocks closed mostly down yesterday on bad retail data and earnings, despite upbeat notes from Washington. Yesterday’s session was set for another celebration of trade and shutdown avoidance but a report of 4th quarter retail sales that showed a sizable slowdown re-kindled hidden fears causing traders to sell.
WHAT YOU NEED TO KNOW:
1) President Trump will sign the bill to fund the government, avoiding another costly shutdown. According to Senate Majority Leader Mitch McConnell, the President will declare a national emergency to cover the border wall shortfall in the new budget. The move is likely to spark legal challenges and has already divided Republicans. Markets appeared to have shrugged off the bold, but mostly expected move.
2) Trade talks in China wrapped up the week with progress. WHILE YOU SLEPT, a tweet by Steven Mnuchin and thumbs up from President Xi Jinping indicate that the negotiations have progressed. “Progressed” means no deal yet, but markets seem content with the progress as the Trump camp signaled that the President is considering a 60 day extension of the March 1 tariff deadline.
3) Retail Sales fell by -1.2% in December shocking investors who were expecting a modest growth. The decline is the largest since 2009 when the US was just emerging from the Great Recession. The number, which followed a benign PPI release, sparked fears of a domestic economic slowdown in months ahead and was initially met with selling in equities.
Well, that was fast. Traders did not get much time to enjoy the recent removal of three big road blocks from Q4: Fed rate hikes, government shutdown, and the trade war. Enter, or rather, re-enter US growth concerns. Retail sales were expected to have risen by +0.1% in December, but instead receded by -1.2% which threw the background fears of economic slowdown into sharp focus for investors. Why would a number like retail sales cause any concern to investors? Remember that the consumer is responsible for roughly 2/3 of the US GDP and, as I have said many times in my daily notes, when the consumer gives up it is the beginning of the road to recession. Some interesting statistics came out of the IRS on Wednesday amongst them was the fact that they expect tax refunds to be smaller by -8% compared to last year. The decline is a result of the changes in the tax code which allows less deductions and individuals have not yet taken changes into account in their tax withholdings. Tax refunds are actually an important factor for many consumers who typically spend those dollars on luxury items or personal debt reductions. Those missing expected dollars will certainly have an effect on consumer behavior. Stocks initially reacted to the Retail Sales number with a sharp selloff but managed to claw their way off the lows, even into positive territory at one point during the later part of the session. Ultimately stocks closed mixed. The S&P 500 fell by -0.27%, the Dow Jones Industrials slipped by -0.41%, the Russell 2000 closed up by +0.14%, and the NASDAQ 100 traded up by +0.9% helped by rallying in the chip sector. The later session comeback in stocks, indicating that equity investors were able to digest their morning fears, was not echoed by bonds, which raises a red flag. Fears of a potential recession cause investors to buy bonds as they are betting on the Fed lowering interest rates and halting bonds sales, and they did just that in response to the morning release. The aggregate bond market rose by +0.2% and the ten year treasury yield, which is the most watched gauge of bond investor recession fears fell by 5 basis points to 2.65%. A move of that magnitude is not common and suggests that the more thoughtful bond traders are not so fast to accept the warning signs.
Later this morning we will get Industrial Production from the Federal Reserve and it is expected to show a month over month increase of +0.1% down slightly from last months +0.3%. We will also get the important University of Michigan Sentiment indicator which is expected to have rebounded slightly 93.7 from last month’s 91.2. Traders will closely look at the Expectations portion of the release which is expected to come in at 85.5 versus last month’s 79.9. To learn more about the importance of consumer confidence gauges and how they are calculated read my note on the topic here: https://www.siebertnet.com/blog/index.php/2019/01/30/they-earned-it/ . This morning we heard from a few companies and the results show misses by Pepsi, Deere & Co., and Moody’s. Consumer goods manufacturer Newell Brands beat Wall Street earnings projections by 6.6% but missed on revenue by -3.47%. We have a number of interesting numbers next week including minutes from the last FOMC meeting, Durable Goods Orders, and PMI. The markets are closed Monday in observance of President’s Day. Have a great weekend and please call if you have any questions.