Thursday, August 15, 2019
- NASDAQ Composite -1.24% Dow -0.89% S&P 500 -0.77% Russell 2000 -0.36%
- NASDAQ Advancers: 895 / Decliners: 1333
- Market Volume (First Hour) +19.1%
- WTI Crude +1.2% , Gold -0.5% , 10yr Treasury 2.5722%
- July Retails Sales M/M advance 0.7% versus an expected 0.3%
- July Retail Sales Control Group +1.0% versus 0.4% expected
- Empire Manufacturing at 4.8 from 4.3 in June
- Philadelphia Fed Business Outlook Survey 16.8 from 21.8 in June
- NonFarm Productivity 2.3% versus expectations of 1.4%
- Unit Labor Costs 2.4% versus expectations of 2.0%
- Initial Jobless Claims up 8k to 220k, and Continuing Claims rose to 1.73 million
- Industrial Production -0.2% and June revised from 0.0% to 0.2%
- Manufacturing Production -0.4% from 0.6% in June
Yesterday was one of those doom & gloom days with the inverted yield curve sending to the Dow Jones down by the fourth largest point loss in its history. Not only that, the Russell 2000 Index is in correction territory and the major bank indexes reached bear market levels. Maybe we should've sold in May and gone away after all. Well no so fast - today we are greeted with strong economic data and earnings that offers a more optimistic narrative. At midday, the market is best described as tentative as the four major averages try holding slight gains but the Nasdaq and R2K have since dipped into the red. Yesterday did some damage in terms of investor confidence, and that doesn't go away overnight. The yield curve is not inverted this morning and has a positive spread of 0.021% yet the 30-year touched another record low, so this story is far from done.
Taking a step back and looking at the recent market, August is supposed to be the quiet easy month before getting back to business in September. Sometimes it works out that way, but not always. We noted in one of our recent monthly Market Reviews that "August seasonality is also not favorable. Over the last ten years August has been the worst performing month, and since 1950 it has been the 2nd worst performer." The last three years have seen a tame August but in 2010, 2011 and 2015 stocks lost more at 4.8%, 5.7% and 6.3% respectively, and we are down 4.7% this month through last night's close.
The US consumer seems to be sailing along just fine. Retail sales rose by the most since March, and that holds true for topline as well as the control group and ex-auto and fuel. Topline sales in July rose by 0.7% in July, more than double estimates. Ex-auto sales rose 1%, also more than double expectations, and ex-auto & fuel sales rose 0.9%. The control group excludes food services, car dealers, building-materials retailers and gas stations, also rose 1% and more than double expectations. To be fair, June data was ratcheted down about 0.1%, but that makes July's strength stand out all the more. Ten of the thirteen retail categories saw increases with online sales jumping 2.8% and department store sales rose 1.2%, the most since October. All told, retail sales have grown steadily over the past five months and that is mostly likely attributed to the strong labor market. Speaking of the job market, weekly new jobless claims ticked up 8k to 220k this past week, still bumping along multi-decade lows. Despite everything else going on in the world, the US job market is hold strong.
Also on today's economic calendar
- Empire Manufacturing rose to 4.8 from 4.3 in June while expectations were for a decline. The Philadelphia Feb Business Outlook fell from 21.8 in June to 16.8 in July, yet expectations called for a decline to 9.5. Nonfarm productivity came in at 2.3% from 3.5% in June, still better than expected and the fourteenth monthly gain. Unit labor cost rose 2.4% from a sharply revised 5.5% in .June. Industrial production fell 0.2% in July, but June was revised from 0.0% to 2.0%, so a net wash. Its similar with Manufacturing production, coming in a little worse than expected at -0.4% while June was revised higher from 0.4% to 0.6%.
Today's sector view is mostly green with Consumer Staples leading with a 1.1% advance. Strong earnings and guidance from Walmart gets the credit, that stock is up nearly 5% and is the top performer in the sector. Although not part of the S&P indexes, online retailer Alibaba is 3% higher on earnings after beating on top and bottom lines. REITs and Utilities are also strong with gains of about 0.9% each, and Financials are getting a nice 0.6% rebound. Crude oil is down for a second day, but the losses are modest with WTI -1.2% and Brent -2.2%. Gold is off 0.1%, giving back some of the recent gains, but the Dollar index is up for a third day.
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Brian's Technical Take
So far August is certainly living up to its historical seasonal trends which as we highlighted at the start of the month is not good. This week alone has been action packed with plenty of bearish global economic data, recessionary signals from the bond market, and deep red price action in equities. With all the noise there is a good chance you missed Angela Merkel's comments on fiscal stimulus.
Speaking on a panel in the Baltics, Chancellor Merkel said she does not see any need for a fiscal stimulus package to counter the slowing economy, "so far." While Germany is well known for its focus on fiscal austerity and a balanced budget, yesterday's economic data showed Q2 GDP contracted 0.1%, in line with expectations. This is just the latest economic data affirming the pervasive slowdown throughout Europe and most of the globe.
Like most global indices outside of the U.S., the German DAX Index peaked 17 months ago in January 2018. More concerning is the rates complex with the 10YR bund yielding a record low, negative 69bps. Low and negative rates have been ongoing in Europe for over decade and it has been a major structural headwind for the banking industry.
Here in the U.S. the KBW Bank Index (BKX) is currently up more than 400% from its 2009 lows. Europe's STOXX Banks Index (SX7E) is currently up ~8% from its 2012 secular lows. The below monthly chart shows the Stoxx Banks Index has this month broken below its 2009 lows and is essentially testing critical support at the 2012 and 2016 lows.
If Europe's plan is to go further into the abyss of negative rates vs. a new approach of greater fiscal stimulus, I would not be surprised to see new lows for Europe's banks. Policy makers are known to respond too slow and too late in times of stress. History could already be repeating.
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Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.