Growth Uncertainty Leads To More Selling Interest

Coming in this morning, there was a distinctly negative bias in the equity futures trade related to growth concerns after China reported a batch of weaker than expected retail sales, industrial production, and fixed asset investment data for July.

It seemed to be a break point for the People’s Bank of China (PBOC), which has been staring at disappointing economic data for too long now. The PBOC cut its one-year medium-term lending facility to 2.50% from 2.65% and lowered the rates on its short-term overnight, seven-day, and one-year standing lending facility by 10 basis points each to 2.65%, 2.80%, and 3.15%, respectively.

Some lackluster sales at Home Depot (HD) in the second quarter and a tepid sales outlook from the Dow component, along with Fitch Ratings warning that it might be forced to downgrade the ratings of dozens of additional banks, added to the growth worries, which were also apparent in weaker oil and copper prices.

Interestingly, they weren’t so apparent in the Treasury market. In fact, the yield on the 10-yr note drifted higher in overnight action. It did so in front of a July Retail Sales report out of the U.S. that was much stronger than expected.

Total retail sales increased 0.7% month-over-month in July (Briefing.com consensus 0.4%) following an upwardly revised 0.3% increase (from 0.2%) in June. Excluding autos, retail sales were up 1.0% month-over-month (Briefing.com consensus 0.4%) after increasing an unrevised 0.2% in June.

The results were powered by a big month of gains in nonstore retailer sales (+1.9%) and food services and drinking places (+1.4%).

The key takeaway from the report is that discretionary spending on goods remained healthy in July, providing another cue that the tight labor market continues to fend off a hard landing scenario for the U.S. economy.

This hard data has overshadowed the soft survey data seen in the August Empire State Manufacturing Survey, which dropped to -19.0 (Briefing.com consensus 2.4) from 1.1 in July. A reading below 0.0 for this report is indicative of a contraction in manufacturing activity.

Separately, there was an expansion so to speak in import and export prices in July. Import prices increased 0.4% month-over-month and export prices rose 0.7%. Nonfuel import prices were flat and export prices, excluding agricultural products, jumped 0.6%. These monthly gains notwithstanding, import and export prices were still down 4.4% and 7.9%, respectively, on a year-over-year basis.

There was some knee-jerk selling interest in the Treasury market following these reports, but it was the retail sales report that was acting as the primary catalyst. The 2-yr note yield climbed above 5.00% and the 10-yr note yield kissed 4.26%. They have since settled back some to 4.99% and 4.23%.

Rising market rates have been a headwind blowing back stock prices in August and today is no different.

Currently, the S&P 500 futures are down 32 points and are trading 0.7% below fair value, the Nasdaq 100 futures are down 88 points and are trading 0.6% below fair value, and the Dow Jones Industrial Average futures are down 279 points and are trading 0.8% below fair value.

That trade is wrapped up in worries about growth, only it isn’t a uniform trade. There isn’t enough growth in China right now and, in the market’s mind, there is perhaps too much growth in the U.S. for the Fed’s liking. Combined it is adding to the uncertainty of what comes next, and that uncertainty is adding to the August inclination to take some money off the table.

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Originally Posted August 15, 2023 – Growth uncertainty leads to more selling interest