August 15 – It was a mixed bag for this morning’s data release on Wall Street, but traders saw what they wanted to see, depending on what they were trading. Stock futures rallied, as did Treasury yields and the dollar on this morning’s data release, while the VIX fell to fresh three-week lows near 15. The dollar Index surged with Treasury yields this morning, as it now trades above 103.1. Yields on 10-year Treasuries are trading near 3.94%, while yields on 2-year Treasuries are trading near 3.93%, while yields on 2-year Treasuries are trading near 4.10%, which is their highest level in nearly two weeks. Yet, a gentle tailwind could be felt in the commodity sector, as this morning’s data further eased recession fears. Crude oil prices traded 1% higher, while the grain and oilseed sector was mixed to higher as well, led by wheat prices.
Retail sales posted their largest month-on-month gain since January 2023 in July. Sales were up 1.0% month-on-month in July, which was more than triple analyst expectations of 0.3% gains, and well above the -0.2% posted in June. The headline number was boosted by a 3.6% rise in motor vehicle and part sales as consumers took advantage of declining prices and interest rates. However, retail sales minus vehicles were still stronger than expected, rising 0.4% month-on-month, with the prior month upgraded to up 0.5%; both of which were well above analyst expectations of 0.1% growth. Retail sales minus both vehicles and gas also rose 0.4%, down from 0.8% gains the previous month, but above analyst expectations of 0.3%. The above numbers reflect healthy consumer demand that responded to declining interest rates in July, and rates had not yet hit their lows during the month yet either. The primary question then is, did we do unnecessary damage to consumer confidence during the brief stock market rout triggered by the yen-carry trade unwind?
First-time claims for unemployment benefits fell to 227K in the week ending August 10th, down from 234K the previous week, and below analyst expectations of 234K. The four-week moving average dropped to 236.5K, down from 241K the previous week. This drops the weekly numbers back closer to the middle of the range that is considered fairly normal for this time of year. Continuing claims for the week ending August 3rd dropped by 7,000 to 1.864 million, with the previous week’s total also revised down by 4,000. Yet, the four-week moving average rose by 1,000 to 1.862 million, which is at its highest level since late November 2021. The jobs numbers overall reflect a softer employment picture than what we’ve seen post-pandemic, but by no means do the numbers reflect a recessionary job market. The argument is that the Fed needs to cut rates before it comes to that, but that’s not a clearly defined line as to when to do that. We’ve seen clearly that it may take 12 to 18 months for a rate hike to impact the economy, but it only takes the mere mention of rate cuts to stimulate the economy. As such, rate cuts work much quicker to stimulate the economy as long as consumer sentiment has not be severely damaged.
The manufacturing industry continues to struggle, with some sectors recovering and some still seeing recessionary conditions. The Philadelphia Fed manufacturing index came in at -7.0 for August, down from 13.9 the previous month and below analyst expectations of 5.8. A number below zero indicates month-on-month contraction. It was the first negative reading for the Philadelphia Fed district since January, but the survey time period was also immediately after the stock market rout, perhaps giving us a look at the impact of that selloff on economic activity. New orders and shipments both declined, but still saw month-on-month growth, while employment contracted. The Empire State manufacturing index was -4.7 for August, but that was an improvement from -6.6 the previous month, and better than analyst expectations of -6.0. The New York district survey revealed ongoing weakness in employment, with a modest decline in new orders, while shipments held steady.
Wheat prices received another boost overnight from reports of a missile strike on Ukraine’s Odessa port area, but early indications are that the damage was relatively minor. Fundamentally, there’s really not anything to justify a sustained rally at this point, but neither is there necessarily a reason to continue lower from these multi-year lows. Farmer selling has seasonally dried up for now, removing one of the sellers in the market, with fund managers already short. The question is, will something cause them to unwind those short positions? There’s also a lot of people asking if corn and soybeans are carving out a bottom? Wheat needs corn to do so, to help it continue to carve out a broad bottom. Brief rallies are common in bear markets, but it would be unusual – but not unheard of – for the corn and soybean markets to confirm a harvest low before the market is confident in the size of the crop. Soybean export sales are picking up at these prices, but the pace is still far below where it needs to be to hit USDA’s optimistic export target for the year, which means that we could see ending stocks rise even higher if current yields match or exceed USDA’s current estimate.
