JULY AUGUST RETAIL SALES RELEASED AT 8:30

The Dow and the NASDAQ were bifurcated as retailers supported the Dow sending that average up 0.7% while tech shares sent the NASDAQ down 0.2%.  Market participants rewarded companies with stronger than expected profit growth (retailers) while punishing shares that are more sensitive to higher interest rates (technology).

Volatility rose throughout the day as the averages swung between gains and losses, evidence of the lack of conviction and liquidity.

Speaking of lack of conviction, bulge bracket firms are equally split between bulls and bears.  The bulls believe the Fed is close to ending this tightening cycle and may reduce rates in 2023. 

The bears believe the Fed is vastly behind the inflationary curve with inflation firmly embedded in the economy via cost push (wage) inflation.  The cost-of-living adjustments (COLAs), the bane of the late 1970s will begin to rear its ugly head in government transfer payments which may then morph into the private sector.

As discussed many times, the current recession is about the lack of supply which is fueling inflation.  The Fed lacks tools to increase supply and Congress is not enacting legislation that creates a conducive manufacturing environment.

The Fed does have the tools to crush demand via higher interest rates.

Many have hypothesized  China has the ability to crush the US via selling their vast Treasury holdings.  While I think the odds of such are low for a myriad of reasons, Chinese holdings of the US Treasury is at a 22 year low.  According to Fed data, China is not a top five holder of our debt, owning $967.8 billion the lowest amount since 2010’s level of $843.7 billion.

Instead of buying Treasuries, the Chinese is investing in their “belt and road initiative” focused in sub-Sahara Africa.

What will happen today?  Retail sales are posted at 8:30 and sales are expected to rise by 0.1%, down 0.1% ex autos.  Yesterday’s data had little market impact.  Capacity Utilization and Industrial Production exceeded expectations.

Housing starts missed by a large margin.  Home sale cancellations rose again in July, equivalent to 16% of properties that went into contract that month.  This is up from 15% in June.  Data suggested the cancellations were greatest in high growth areas such as Jacksonville, Las Vegas and Boise which saw cancellation rates of 29%, 27% and 26%, respectively.

What will happen today?

Last night the foreign markets were mixed. London was down 0.33%, Paris down 0.46% and Frankfurt down 0.93%.  China was up 0.45%, Japan up 1.23%  and Hang Seng up 0.46%.

Dow and NASDAQ futures are down 0.4% and 0.8%, respectively as the Fed’ s aggressive interest rate path outweighed optimism over corporate earnings and China’s stimulus plans. The 10-year is off 18/32 to yield 2.88%.

 

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