Counting the Minutes: Fed Eyed For Possible Hints Of Balance Sheet Plans, Rate Hike

Fed minutes and Target Corporation TGT results step into the spotlight today as the market continues to ease back on the so-called “fear trade” after last week’s volatile action.

Wednesday afternoon brings the release of minutes from the July Federal Open Market Committee (FOMC) meeting. Investors might be interested to see if there’s more detail on the Fed’s balance sheet reduction plans, though it’s unlikely the minutes will spell that out in a really granular way. As always, be on the lookout for any change in wording from the previous meeting and for any hints of a possible rate increase by the end of the year. Odds of that now stand at 49%, according to CME Group futures.

Target (TGT) is the big name reporting this morning, followed by Wal-Mart Stores Inc WMT before the opening bell tomorrow. The news from TGT looked encouraging, as the company beat analysts’ estimates for revenue and earnings. Same-store sales rose 1.3%, compared with Wall Street’s 0.7% expectations. Perhaps more importantly, digital sales rose 32%, a sign that TGT continues to attract shoppers to its online portal. Shares of TGT rose in pre-market trading. TGT’s strong results could serve as more proof that consumers are out there. Retailers just have to find a way to get them into stores.

WMT is expected to report earnings of $1.06 per share, down one cent from $1.07 in the prior-year quarter, on revenue of $122.7 billion, according to Wall Street consensus analyst estimates. Revenues are expected to grow 1.5% year over year. The thing to consider going into WMT’s earnings is that while the retail sector has seen some weakness, Kohl’s Corporation KSS and TGT each had strong performances, and both of those companies have businesses that are highly correlated with WMT. This could raise expectations for WMT.

Tuesday was a yawner of a day, with the S&P 500 Index (SPX) staying within a 10-point range. The Dow Jones Industrial Average ($DJI) posted slight gains, and if it rises today it will be on a four-session win streak.

While Tuesday’s stock market was like watching paint dry, bond trading over the last day or so could be a better indicator of market sentiment. As North Korean fears receded, bond prices fell moderately, with the benchmark 10-year Treasury yield climbing to 2.28% by early Wednesday. That compares with around 2.2% at the height of the geopolitical drama last week.

Rising yields might also partly reflect Tuesday’s solid retail sales report for July, which came in above Wall Street analysts’ expectations with the biggest gain in more than half a year (see below). The August Empire Manufacturing number also came in well above estimates on Wall Street.

So-called “safe havens” also kept up their retreat, with gold and the VIX stepping back. The VIX recently traded at 11.56, down from above 15 at last week’s peak.

Financials, info tech, utilities, and consumer staples performed well on Tuesday. Transports continued their march higher. What didn’t look so good was consumer discretionary, which fell nearly 1%. This sounds a bit surprising, considering earnings from Home Depot Inc HD easily surpassed analysts’ expectations for earnings and the company raised guidance. However, its revenue didn’t beat estimates by as much as some investors might have hoped, and the stock got punished. 

From a broader perspective, it’s possible HD also got caught up in overall weakness as a couple other retailers including Coach Inc COH and Dick’s Sporting Goods Inc DKS disappointed with revenue and guidance, respectively.

On the data front, Wednesday’s housing starts and building permits numbers came in well below analysts’ expectations.

FIGURE 1: CALMER WATERS. As tensions eased early this week between North Korea and the U.S., the 10-year-Treasury yield, plotted here over the last five sessions, bounced back to levels it was at before the international situation ramped up. VIX (purple line), came down as well, though it remains above recent record lows. Strong economic data Tuesday also might have supported bond yields. Data sources: CBOE, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Will Up-And-Down Pattern Repeat on Production?

Tomorrow morning brings July industrial production data, and the question is whether the recent on-again/off-again pattern will continue. Production rose a healthy 0.4% in June after barely climbing in May. That followed a big uptick in production in April, which in turn came after a weak reading in March. So if the pattern continues, July might show a less robust figure. We know, however, that past isn’t prologue, and analysts are predicting decent growth of 0.3% in July, according to Briefing.com. Back in June, capacity utilization of 76.4% was below the long-term average, so let’s see if that number picks up. If it does, it could indicate more economic vigor.

Congress Back in Focus

As the crisis atmosphere of last week ebbs and North Korea recedes a bit in the headlines, the focus could turn back to Washington, D.C., in coming weeks. Congress has a lot on its plate, including the approaching deadline to raise the debt ceiling. The Treasury Department says Congress needs to raise the debt ceiling by Sept. 29 to ensure the government can pay its bills. Keep that date circled on the calendar and look out for possible volatility as it approaches. 

Are Car Sales Revving Up?

One positive aspect of Tuesday’s solid July retail sales report was a 1.2% rise in the “auto and other motor vehicle dealers” category. Though monthly auto sales data the last few months mostly disappointed, the last two monthly retail sales reports showed some life for the auto sector. That could be a sign that recent robust jobs growth has consumers thinking about getting some new wheels. July’s 1.2% rise followed a 0.9% rise in the category in June. Overall, retail sales jumped 0.6% in July, above analysts’ estimates and the largest monthly rise since last December. Keep an eye on analysts’ Q3 gross domestic product estimates to see if they start to work the retail sales report into their numbers.