Market Overview

Data Dump: After Retail Sales Surprise, Street Awaits CPI, Housing Numbers


Could Friday’s strong retail sales report, along with numerous data this coming week and rising Q2 gross domestic product (GDP) estimates, help revive a sluggish market?

The S&P 500 Index (SPX) has traded between 2050 and 2100 for most of the last month, seldom dipping above or below those levels even intraday. That didn’t change last week in spite of some major fundamental input, including the May 6 monthly jobs report and last Friday’s retail sales and Producer Price Index (PPI) data. As of midday Friday, the market was down slightly from Thursday’s close and barely changed for the week.

There’s no lack of new data this coming week, with housing starts, the Consumer Price Index (CPI), industrial production and existing home sales all on the way. But before moving along to those reports, it’s worth examining Friday’s retail sales data, which came in well above expectations at 0.8% growth for April excluding autos, marking the best gain in a year. With autos factored in, retail sales rose 1.3%. Growth was strong in a number of areas, including autos, gas stations and online retailers.

But what about those disappointing results last week from Macy’s Inc (NYSE: M), Kohl’s Corporation (NYSE: KSS) and Nordstrom, Inc. (NYSE: JWN), you might ask. How do those weak numbers co-exist with an overall strong rate of consumer spending? Well, for one thing, it might mean that we can no longer really rely on brick-and-mortar retailer earnings to make projections about what consumers are doing, since so much of today’s shopping occurs online.

The good news in those retail sales numbers was that it shows the consumer is alive and well but may have shifted their preferences. There was an interesting nugget in the JWN sales. Nordstrom Rack sales were relatively strong, perhaps implying the discounting area is where the story is for brick and mortar. If this continues, it could be really bad news for department type stores that already operate on razor thin margins. But it may help the "big box"-type and discount retailers

Wherever they may come from, strong retail sales typically reflect a healthier consumer, which can have an impact on GDP. And Q2 GDP estimates appear to be rising quickly. The closely watched Atlanta Fed GDPNow model for 2Q GDP rose to 2.8% on Friday, up from 2.2% earlier in the week and 1.7% the week before. And it stems at least in part from the accelerating retail sales data. “After this morning's retail sales report from the U.S. Census Bureau, the forecast for second-quarter real consumer spending growth increased from 3.0% to 3.7%,” the Atlanta Fed said Friday.

In Q1, GDP was a sluggish 0.5%, according to the government’s initial estimates. But in recent years, first quarter growth has tended to be weak, with later quarters more robust.

Meanwhile, the core Producer Price Index (PPI) came in at 0.1% in April, as expected, and the headline PPI number was flat year over year. Inflation doesn’t seem to represent much of a threat to the consumer, though this coming Tuesday’s CPI data could give us a broader picture. And with 10-year Treasury rates edging down toward 1.7% by the end of last week, mortgage rates have fallen to three-year lows (see below), which could possibly factor into housing starts and existing home sales.

Every week, it seems, there’s new hope that some data or other could deliver a catalyst that might help send markets on a clearer path. But if this coming week is like the last few, all the data ahead may not be enough. Instead, it’s possible the market could remain sluggish until next month, which brings the triple-header of an OPEC meeting, a Fed meeting, and the British vote on whether to stay in or leave the European Union (the so-called “Brexit” referendum scheduled for June 23).

Economists in WSJ Survey See Clouds on Horizon: Forecasters in The Wall Street Journal’s monthly survey of business, academic and financial economists aren’t very optimistic about the year ahead, the newspaper reported last week. On average, they see a 20% chance that the U.S. will fall into recession in the next year, about double the risk of last year. They believe the pace of job growth is likely to slow, and worry about the risk of economic fallout in the U.S. if China’s economy continues to deteriorate. They also worry that the coming U.S. Presidential election may be contributing to economic uncertainty, saying some businesses seem to be deferring investment and hiring decisions until they have a better sense of the direction of the new administration.

SPX Anniversary Approaching: This coming Friday, May 20, marks the one-year anniversary of the S&P 500 Index (SPX) posting its all-time intraday high of 2134.72. Barring a major rally in the next several days, that mark from last May seems unlikely to be challenged in time for its anniversary, though the SPX did pop above the 2110 level briefly last month. The index has bumped up against 2100 several times in the year since posting that high, but hasn’t stayed convincingly above that level, which remains a point of psychological resistance.

U.S. Mortgage Rates Lowest in Three Years: Housing starts data are due this coming Tuesday and existing home sales come out on Friday. In the background are 30-year fixed rate mortgage rates that fell last week to three-year lows at 3.57%, the Federal Home Loan Mortgage Corp. (Freddie Mac) said Thursday. That compared with 3.61% the prior week and 3.85% a year ago, and is the lowest since May 2013. The 30-year fixed rate has dropped 44 basis points since the first of the year. "Disappointing April employment data once again kept a lid on Treasury yields, which have struggled to stay above 1.8% since late March,” said Sean Becketti, Chief Economist, Freddie Mac, in a press release. “Prospective homebuyers will continue to take advantage of a falling rate environment that has seen mortgage rates drop in 14 of the previous 19 weeks." Will this translate into strong housing starts and existing home sales? The data could help tell.


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