Fixed income and equities are each improving Friday morning with the stock market rising nearly half a percentage point while Treasuries are picking themselves up following a rapid sell-off Thursday afternoon.
Exceptional volatility brought the Dow up 423 points Thursday – its fourth move of more than 400 points – while Treasuries were on the defensive after a weak 30-year auction triggered a massive sell-off led by 30-year rates jumping 27 basis points.
The 10-year yield is four basis points firmer at 2.29% and the 30-year yield is four basis points firmer at 3.75%. The two-year yield is the only part of the curve softening: its yield is one basis higher at 0.20%.
SP 500 futures are up 4.2 points (+0.36%) at 1,172.70, and Dow futures are 23 points up (+0.21%) at 11,107.
Discerning what is causing the volatility is a bit like describing what caused the London riots this week – theories abound, but much is a mystery. Not all analysts even agree that Standard Poor’s played a role when it downgraded the sovereign credit.
The impact is global. “France, Spain, Italy and Belgium banned short-selling of financial stocks in an effort to stabilize the hard hit sector,” noted BMO Capital Markets this morning. “Regulators were concerned that short sellers were spreading false rumors to drive down bank shares. Rumors or reality, the strain in Europe’s banking sector has increase markedly over the past month.”
Global equities were mixed overnight. Stocks rose 0.48% in China and 0.13% in Hong Kong, but shares fell 0.20% in Japan. The ongoing session in Europe has stocks on a major climb: France’s CAC-40 is 2.15% and London’s FTSE 100 is up 1.63%.
Meantime, light crude oil dropped 0.15% overnight to $85.59 per barrel, while gold prices rose 0.09% to $1,753.00.
Key Events Today:
8:30 – The week’s biggest report, Retail Sales, should help the market forecast how third-quarter GDP is shaping up. Thankfully, the estimates are actually pretty good. The median forecast expect retail sales to grow 0.5% in July, with estimates ranging from 0.1% to 1.5%. In June the index grew only 0.1%, just enough to erase a 0.1% loss in May.
However, the details are a bit troubling and don’t point to sustained growth for the rest of 2011.
One major factor helping the July figure is auto sales, which contributes 0.5 percentage points to the 0.9% forecast from Nomura Global Economics. Otherwise they expect sales to increase 0.4%, with 0.2 percentage points stemming from gasoline stations sales.
“Light vehicle sales improved to 12.2 million units in July as the supply chain disruptions from Japan’s earthquake in mid-March started easing and some pent-up demand was released,” added economists at IHS Global Insight. “Retail sales excluding autos are expected to rise 0.3% in July, after being flat in June. Gasoline stations’ sales should rise, but that’s not good news since gasoline prices rose over 10 cents per gallon over the course of the month.”
Janney Capital Markets offered some interesting details: “We see higher car sales pulling all-items retail activity higher, even though a substantial portion of the 7% increase in auto sales was fleet-driven. On the core side, clothing sales seem to have had a tough time, evidenced by same store sales declines even at the likes of Walmart. Higher cotton prices, which have finally filtered down through the supply chain, have a significant role to play, and the reduced sales points out what occurs when producers and retailers attempt to raise prices into a stagnant consumer climate.”
“On balance,” they concluded, “it looks like July’s results will be a poor setup for the August – September back to school retail season, the second most important sales period of the year.”
9:55 – “Frightened” might be the feeling I have writing about where Consumer Sentiment will be in August. The index dropped to its lowest since March 2009 at 63.7, and that was on July 29 – the following six sessions saw the Dow plummet 796 points. According to The Wall Street Journal, market capitalization in the SP 500 fell $844 billion in the first week of August. So… how will consumers feel about that?
Economists, I dare say, are out to lunch entirely on this one. The consensus estimate is 63.0, with estimates ranging from 59 to 66. Those expecting an uptick say little more beyond that a “bounce” often occurs after a larger-than-anticipated dip.
Forecasters at IHS Global Insight are more sensible, predicting “another hit in early August” with the index falling to 59.
“Consumers have been pounded with bad news and the negativity from the debt ceiling crisis threw more fuel onto the fire,” they wrote. “The housing market is not going anywhere, food prices are still increasing, the stock market is in a tizzy, household net worth is falling, employment growth has slowed, the European debt crisis is back in full swing, and if all this was not enough – gasoline prices increased during the month of July.”
More sensible analysis could be found at Citigroup: “Consumer sentiment likely fell again in early August after a dramatic drop in July. Equity market movements have cut into household wealth, and economic pundits have highlighted the risk of recession.”
10:00 – After posting a 1% gain in May, Business Inventories are to grow 0.6% in June. This might sound good, but it’s arguable these apparently healthy gains won’t be matched by sales, and that would leave businesses with stock-filled shelves and little demand later in the year.
According to BBVA, inventories are approaching three-year highs.
“Declining consumer confidence and weak demand has contributed to high inventories for manufacturers, retailers, and merchant wholesalers,” they wrote. “Durable goods inventories increased in June, mostly due to transportation equipment, and nondurables are likely to continue the 6-month upward trend. Thus, we expect business inventories to remain high in June.”
Citigroup points out that inventories have already been growing the past 17 months, and they are optimistic it could keep going.
“The rapid rise in inventories may have further to run, they added. “Stockpiles have not yet matched the previous cyclical peak.”