Once again, the Fed’s best intentions to construct a narrative for raising interest rates this year have been thwarted. This time the culprit was the economic calendar.
Retail sales for July were expected to rise by 0.4%, keeping a three-month growth streak alive, but instead July showed no change in total retail sales after an upwardly revised 0.8% in June.
Excluding autos, retail sales declined 0.3%, with gasoline sales falling 2.7% as the main drag on the data. Other weak spots included sporting goods, hobby, book and music stores (-2.2%), food and beverage stores (-0.6%), building material and garden equipment and supplies dealers (-0.5%), clothing and accessories (-0.5%), food services and drinking places (-0.2%), general merchandise stores (-0.1%) and electronics and appliance stores (-0.1%).
Motor vehicle and parts dealers (+1.1%) provided an influential offset of sorts. But by and large, there was a slowdown in sales across most categories following some relatively strong sales performances in June. Core retail sales, which exclude auto, gas station, building material, and food services sales, and which factor into the goods component for personal consumption expenditures in the gross domestic product (GDP) report, were flat.
It is important to look at all the details of the monthly retail data because there is always the possibility of a specifically large negative number from one of the sub-categories. In the case of the July read, there was just simply a soft patch across the spectrum. The key takeaway from the retail sales report is that the consumer, which everyone is counting on to drive economic activity, slowed his/her pace of discretionary spending in July. Treasuries made an about face from the recent selling pressure with bond prices spiking on the news, taking the benchmark 10-year T-Note yield back down to 1.48% from last Monday’s high print of 1.62%.
The dollar also fell to its lowest level since June 23, in accordance with the notion that the Fed will be in no rush to raise interest rates this year. Wholesale prices, as measured by the Producer Price Index, or PPI, unexpectedly sank as much as at any point in almost the last year to reinforce that outlook. These two downer reports only support the ongoing belief that central bank stimulus and low inflation are a bullish backdrop for equities. They also seem to explain why there is little, if any, giveback in the U.S. or global stock markets after the S&P 500 closed at an all-time high last week, reaching 2,200.
Despite the rationale, cheap oil ought to be a bullish catalyst. The stock market still appears to be joined at the hip with the direction of oil prices. After WTI crude traded briefly under $40/barrel, the S&P pulled back off of its highs only to reassert itself as crude traded back up to $44/bbl. Zacks Research spelled it out pretty clearly: lower oil prices = lower energy costs = more money to spend on everything else = only oil related stocks should go down on this news = other stocks should go up. Saudi Arabia signaled it is prepared to discuss stabilizing markets at informal OPEC discussions next month after prices tumbled from the recent high of $53/bbl to $40/bbl. There is little to hang our hats on in terms of material coming out of this meeting. OPEC, for all intents and purposes, is busted and the global oil market reflects more of an “every man for himself” landscape. As oil stays in the $40-$45/bbl range, equity markets should keep trading higher.
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In case you missed it, I encourage you to read my e-letter column from last week about how stock market bulls have taken strong data and run with it. I also invite you to comment in the space provided below my commentary.