Markets make modest gains on mixed inflation and retail data:
Although the S&P 500 posted a 0.5% gain and the Dow closed up 0.3%, the price action in the equity, Forex, and commodity markets were fairly muted as each market moved in tighter ranges with overall sloppy and choppy price action. The earnings news from Goldman Sachs did little to excite the markets as it became apparent that participants bought the rumor yesterday and sold the fact today.
As I mentioned in last night's update, the markets would want to see higher inflation numbers and better retail sales in order to move up today. The PPI, Retail Sales, and Business Inventories data were quite mixed from an inflation perspective... although the headline numbers gave the appearance of price pressures and some recovery in the consumer sector, once the curtains were pulled back there were obvious signs of lingering deflation. So, because there was no clear view that inflation or the consumer was back in full force, equities, commodities, and the higher-yielding currencies were only able to make minimal gains.
Signs of lingering deflation--
The headline numbers on today's PPI and Retail Sales were inflationary enough to give the S&P 500 and Dow a boost and the dollar and yen a kick lower, but after dissecting the data, the inflation components hidden within the reports were nothing to write home about. When it comes to interpreting fundamental and economic data, the headline numbers get most of the attention but big players who move the markets with their money flows always look beyond the headlines to find the real "truth", if you can call it truth.
If there were true inflationary components within the data, Wall St. would have rallied and made bigger gains on Tuesday along with crude, gold, and higher-yielders like the EUR/USD and GBP/USD, but the gains were very muted. Lets take a look at made today's fundamentals less exciting than they looked on the surface...
PPI and Core PPI: the headline numbers on those reports printed hotter than the market was forecasting but it was all due to energy. The crude price component to PPI was up by 6.6% and that was purely based on the fact crude oil hit $72 in June. The food price component was up by 1.1%, but once you look past that, with all other price components factored in, PPI is actually down -4.6% year-over-year and that number screams deflation.
It would be a totally different story if consumer demand was forcing producers to raise prices at the wholesale level but this is not the case at all, the slight month-over-month increase is all connected back to energy and not rising consumer demand. With PPI at -4.6%, it's hard to see any true price inflation within the data.
Retail sales: the headline numbers seemed decent but once you look under the hood it's plain as day the consumer is dead from a discretionary spending standpoint. The main reason the retail data looked not-so-bad was thanks to gasoline prices rising by 18.5%, home heating oil jumping 15.4% and propane going up by 14.6%.
Consumers were forced to pay more for non-discretionary retail products, they weren't out running up their credit cards at the shopping malls. In fact, retail sales are down a hefty -9.0% year-over-year. And once you back out what the consumer spent on energy and autos, retail sales were actually down -0.2% from just the prior month. The news gets even better... department stores reported a -1.3% drop on their retail sales.
Business Inventories: this report probably gets neglected by the larger segment of the market, but once again, the big players who move the markets break this report down too because it offers a great view on inflation/deflation. Unfortunately, these fundamentals were more deflationary than inflationary. According to the Commerce Department, Business Inventories dropped by -1.0% month-over-month.
Why would a drop in inventories be deflationary? It's simple, less demand forces the reduction of on-hand goods and that is purely deflationary. The report also showed that business sales were lower by -0.1%, and manufacturing sales were -0.9%. Going back to the retail sector, retailers decreased their inventories by -1.6%. Manufacturing inventories fell by -0.6% and wholesaler inventories were -0.8%. And when you break it all down, the report showed business inventories have contracted for 9-months straight and are down -8.0% year-over-year while business sales are down -17.8% year-over-year.
Price inflation may be here sometime in the future but at this point I don't see it around the corner or on the horizon, not with those kinds of numbers. Wall St., crude, gold, and the higher-yielding currencies flat out need inflation to make sustainable upside moves and at this point it just doesn't exist.
Wall St. earnings data will continue moving equity and Forex markets:
As I sat down to write this update Intel released their earnings, which came in much better than expected, and within a matter of seconds the S&P 500 and Dow futures surged to their highest levels all week, pulling the EUR/USD, GBP/USD, EUR/JPY, and GBP/JPY up with them.
Whether or not traders believe news moves markets, it doesn't matter, the human reaction to the news is what moves markets and I don't see any end in sight to that trend. I'm not suggesting traders use the earnings reports as actual trade indicators for their favorite currency pair but what is important is to be consciously aware of when this data will hit the markets so you do not find yourself caught off guard or potentially on the wrong side of an extended market move.
The markets remain highly emotional and will continue reacting emotionally whenever the opportunity presents itself. For now, the earnings data will be one of the main catalysts which cause these emotional reactions. Earnings season will last for the next few weeks after getting their start last Wednesday. Since earnings season started the news has been surprisingly good, and in turn, the S&P 500 has posted a 3.0% gain and the Dow has moved up by 2.3%.
There is another benefit to paying attention to the earnings data... looking over the numbers can give good insight into the state of the economy. For example, JB Hunt, which is a huge trucking line in the US, underperformed on its earnings expectations. It should be easy to put 2 and 2 together on this one... JB Hunt is a major player in terms of shipping consumer and retail goods across the country in addition to having connection to the manufacturing and business sector. If JB Hunt's revenues are down, they're not hauling, and if they're not hauling, there is less demand from those various growth-related sectors.
While it might be all well and good that a pseudo hedge fund like Goldman Sachs can turn a $3 billion profit, keep in mind until just a few weeks ago they had $10 billion in taxpayer equity to work with, and they borrowed $28 billion from the FDIC at near zero interest rates, and they got $5 billion from Warren Buffet in order to make their moves in the market. Goldman was levered up by 17:1 (equity/assets) and had the full faith and confidence of the Fed, Treasury, and FDIC backing their trades. If making money in the markets were only that easy...
A company like JB Hunt doesn't have those luxuries but they are the real bellwethers of the economy, not Goldman Sachs. So as were in the midst of earnings season, do yourself a favor and look at the performance of companies who haven't been bailed out by taxpayers and who conduct business in the consumer, retail, housing, manufacturing, and transportation sectors. They will give much better insights into the state of the economy.
My favorite resource to keep up with the earnings data is here.
Wednesday trading:
Don't forget the BOJ has an interest rate event early this morning (NY time). The BOJ usually holds their press conference any time after 2300 EST but typically after midnight EST. There's been a good deal of volatility with the Japanese yen the past week and any strength in the yen would obviously be unwelcomed by the BOJ, so what traders need to be on the lookout for are threats or rhetoric to weaken the yen. Should the BOJ hit the markets with anti-yen verbal rhetoric I would expect to see the yen crosses soar violently. The exporting situation in Japan is too dire to handle an appreciating yen, especially against the dollar, it's too much of a hindrance to growth.
Fundamentally, we have a big day tomorrow and once again much of the focus will be on inflation as we get Eurozone CPI and US CPI data. The euro came under pressure from weak Eurozone fundamentals on Tuesday morning and should CPI print strongly negative I would expect to see the euro sold-off. It's anybody's guess how the US consumer inflation data will print, but I'm not expecting a negative number, not with the way that food and energy prices have ticked up in June.
Beside CPI the markets will also have to contend with Capacity Utilization (price inflation connected), Industrial Production, Crude Inventories, and the FOMC Meeting Minutes. The FOMC is the real wild card tomorrow because there's no telling what kind of surprises the Fed may decide to hit the markets with. If the Fed wants to see a return of euphoria in order to push equities higher, the FOMC minutes will provide the perfect opportunity to pump up the markets.
There's been a consistent price action trend for Wednesday's to be the most volatile day of the week and I think we could see another repeat performance of strong price swings and extended price moves. Unless we get some shocking downside surprises tomorrow I expect to see a continuation of more upside gains for the higher-risk, higher-yielding markets. For tonight, expect the price action to pick up after 2300 EST and watch out for the BOJ and Fed on Wednesday...
-David
Although the S&P 500 posted a 0.5% gain and the Dow closed up 0.3%, the price action in the equity, Forex, and commodity markets were fairly muted as each market moved in tighter ranges with overall sloppy and choppy price action. The earnings news from Goldman Sachs did little to excite the markets as it became apparent that participants bought the rumor yesterday and sold the fact today.
As I mentioned in last night's update, the markets would want to see higher inflation numbers and better retail sales in order to move up today. The PPI, Retail Sales, and Business Inventories data were quite mixed from an inflation perspective... although the headline numbers gave the appearance of price pressures and some recovery in the consumer sector, once the curtains were pulled back there were obvious signs of lingering deflation. So, because there was no clear view that inflation or the consumer was back in full force, equities, commodities, and the higher-yielding currencies were only able to make minimal gains.
Signs of lingering deflation--
The headline numbers on today's PPI and Retail Sales were inflationary enough to give the S&P 500 and Dow a boost and the dollar and yen a kick lower, but after dissecting the data, the inflation components hidden within the reports were nothing to write home about. When it comes to interpreting fundamental and economic data, the headline numbers get most of the attention but big players who move the markets with their money flows always look beyond the headlines to find the real "truth", if you can call it truth.
If there were true inflationary components within the data, Wall St. would have rallied and made bigger gains on Tuesday along with crude, gold, and higher-yielders like the EUR/USD and GBP/USD, but the gains were very muted. Lets take a look at made today's fundamentals less exciting than they looked on the surface...
PPI and Core PPI: the headline numbers on those reports printed hotter than the market was forecasting but it was all due to energy. The crude price component to PPI was up by 6.6% and that was purely based on the fact crude oil hit $72 in June. The food price component was up by 1.1%, but once you look past that, with all other price components factored in, PPI is actually down -4.6% year-over-year and that number screams deflation.
It would be a totally different story if consumer demand was forcing producers to raise prices at the wholesale level but this is not the case at all, the slight month-over-month increase is all connected back to energy and not rising consumer demand. With PPI at -4.6%, it's hard to see any true price inflation within the data.
Retail sales: the headline numbers seemed decent but once you look under the hood it's plain as day the consumer is dead from a discretionary spending standpoint. The main reason the retail data looked not-so-bad was thanks to gasoline prices rising by 18.5%, home heating oil jumping 15.4% and propane going up by 14.6%.
Consumers were forced to pay more for non-discretionary retail products, they weren't out running up their credit cards at the shopping malls. In fact, retail sales are down a hefty -9.0% year-over-year. And once you back out what the consumer spent on energy and autos, retail sales were actually down -0.2% from just the prior month. The news gets even better... department stores reported a -1.3% drop on their retail sales.
Business Inventories: this report probably gets neglected by the larger segment of the market, but once again, the big players who move the markets break this report down too because it offers a great view on inflation/deflation. Unfortunately, these fundamentals were more deflationary than inflationary. According to the Commerce Department, Business Inventories dropped by -1.0% month-over-month.
Why would a drop in inventories be deflationary? It's simple, less demand forces the reduction of on-hand goods and that is purely deflationary. The report also showed that business sales were lower by -0.1%, and manufacturing sales were -0.9%. Going back to the retail sector, retailers decreased their inventories by -1.6%. Manufacturing inventories fell by -0.6% and wholesaler inventories were -0.8%. And when you break it all down, the report showed business inventories have contracted for 9-months straight and are down -8.0% year-over-year while business sales are down -17.8% year-over-year.
Price inflation may be here sometime in the future but at this point I don't see it around the corner or on the horizon, not with those kinds of numbers. Wall St., crude, gold, and the higher-yielding currencies flat out need inflation to make sustainable upside moves and at this point it just doesn't exist.
Wall St. earnings data will continue moving equity and Forex markets:
As I sat down to write this update Intel released their earnings, which came in much better than expected, and within a matter of seconds the S&P 500 and Dow futures surged to their highest levels all week, pulling the EUR/USD, GBP/USD, EUR/JPY, and GBP/JPY up with them.
Whether or not traders believe news moves markets, it doesn't matter, the human reaction to the news is what moves markets and I don't see any end in sight to that trend. I'm not suggesting traders use the earnings reports as actual trade indicators for their favorite currency pair but what is important is to be consciously aware of when this data will hit the markets so you do not find yourself caught off guard or potentially on the wrong side of an extended market move.
The markets remain highly emotional and will continue reacting emotionally whenever the opportunity presents itself. For now, the earnings data will be one of the main catalysts which cause these emotional reactions. Earnings season will last for the next few weeks after getting their start last Wednesday. Since earnings season started the news has been surprisingly good, and in turn, the S&P 500 has posted a 3.0% gain and the Dow has moved up by 2.3%.
There is another benefit to paying attention to the earnings data... looking over the numbers can give good insight into the state of the economy. For example, JB Hunt, which is a huge trucking line in the US, underperformed on its earnings expectations. It should be easy to put 2 and 2 together on this one... JB Hunt is a major player in terms of shipping consumer and retail goods across the country in addition to having connection to the manufacturing and business sector. If JB Hunt's revenues are down, they're not hauling, and if they're not hauling, there is less demand from those various growth-related sectors.
While it might be all well and good that a pseudo hedge fund like Goldman Sachs can turn a $3 billion profit, keep in mind until just a few weeks ago they had $10 billion in taxpayer equity to work with, and they borrowed $28 billion from the FDIC at near zero interest rates, and they got $5 billion from Warren Buffet in order to make their moves in the market. Goldman was levered up by 17:1 (equity/assets) and had the full faith and confidence of the Fed, Treasury, and FDIC backing their trades. If making money in the markets were only that easy...
A company like JB Hunt doesn't have those luxuries but they are the real bellwethers of the economy, not Goldman Sachs. So as were in the midst of earnings season, do yourself a favor and look at the performance of companies who haven't been bailed out by taxpayers and who conduct business in the consumer, retail, housing, manufacturing, and transportation sectors. They will give much better insights into the state of the economy.
My favorite resource to keep up with the earnings data is here.
Wednesday trading:
Don't forget the BOJ has an interest rate event early this morning (NY time). The BOJ usually holds their press conference any time after 2300 EST but typically after midnight EST. There's been a good deal of volatility with the Japanese yen the past week and any strength in the yen would obviously be unwelcomed by the BOJ, so what traders need to be on the lookout for are threats or rhetoric to weaken the yen. Should the BOJ hit the markets with anti-yen verbal rhetoric I would expect to see the yen crosses soar violently. The exporting situation in Japan is too dire to handle an appreciating yen, especially against the dollar, it's too much of a hindrance to growth.
Fundamentally, we have a big day tomorrow and once again much of the focus will be on inflation as we get Eurozone CPI and US CPI data. The euro came under pressure from weak Eurozone fundamentals on Tuesday morning and should CPI print strongly negative I would expect to see the euro sold-off. It's anybody's guess how the US consumer inflation data will print, but I'm not expecting a negative number, not with the way that food and energy prices have ticked up in June.
Beside CPI the markets will also have to contend with Capacity Utilization (price inflation connected), Industrial Production, Crude Inventories, and the FOMC Meeting Minutes. The FOMC is the real wild card tomorrow because there's no telling what kind of surprises the Fed may decide to hit the markets with. If the Fed wants to see a return of euphoria in order to push equities higher, the FOMC minutes will provide the perfect opportunity to pump up the markets.
There's been a consistent price action trend for Wednesday's to be the most volatile day of the week and I think we could see another repeat performance of strong price swings and extended price moves. Unless we get some shocking downside surprises tomorrow I expect to see a continuation of more upside gains for the higher-risk, higher-yielding markets. For tonight, expect the price action to pick up after 2300 EST and watch out for the BOJ and Fed on Wednesday...
-David
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