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Disappointing Data: Retail Sales Fail To Impress As Fed Meeting Approaches

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September 15, 2016

 (Thursday Market Open) The string of disappointing economic data continued Thursday as retail sales for August came in below expectations. The continued weakness in government data points may add to speculation that a Fed rate hike next week is unlikely.

August retail sales fell 0.3%, compared to Wall Street analysts’ consensus expectation for a 0.1% drop, the U.S. government said early Thursday. This was the latest data to show less than stellar U.S. economic performance. However, it’s worth noting that the S&P 500 Index (SPX) hasn’t moved much in response to retail sales in recent months.

If there had been speculation before Thursday that today’s host of data points could convince the Fed to lean toward a September rate hike, it now appears those expectations have been dashed. Expectations for a September hike fell to 12% early Thursday, down from 15% on Wednesday, according to CME Group futures.

Retail sales weren’t the only major numbers on the menu this morning. U.S. producer price index (PPI) data also released early Thursday came in at no change from the previous month, compared with analysts’ consensus for a 0.1% rise. Again, no sign of incipient inflation in producer prices would seem to weigh against the Fed doing anything at its meeting next week.

The core PPI number, however, which strips out food and energy, rose 1.2% over the last year, the government said, up from 0.8% the prior month. Still, the numbers are well below the Fed’s 2% inflation target.

New unemployment claims came in at 260,000 for the week, below expectations for 265,000.

With all of today’s data, don’t forget that more numbers are due Friday morning before the opening bell. These include the August consumer price index (CPI), core CPI, and a first look at September consumer sentiment from the University of Michigan.

Consensus for CPI is 0.2% in August, up from 0.1% in July, according to Briefing.com. Core CPI is seen growing 0.2%, compared with 0.1% the previous month. Michigan sentiment is expected to come in at 91.5, up from the prior 89.8.

The key report to watch is core CPI, which strips out the volatile food and energy categories. As of July, year-over-year core CPI was 2.2%, down from 2.3% in June. In July, housing and medical costs were among those contributing to the rise in core CPI.

Tomorrow also marks so-called “quadruple witching,” the expiration date for stock index futures, stock index options, stock options, and single stock futures. Friday is one of just four days in the year when all of these asset classes expire the same day, and typically traders unwind some of their positions heading into such a trading session. That sort of position unwinding today could cause sudden movements in the market, so investors should be on the lookout for more volatility than usual today.

Quadruple witching aside, trading over the next few days could be somewhat conservative ahead of the Fed meeting as investors look to avoid risk. Though expectations for a hike are receding, it is possible the Fed could deliver some more hawkish language about the future, meaning expectations for a December hike could rise.

Falling oil prices continue to be a drag on the stock market, as some investors worry that slipping oil demand could point to slowing economic growth. Oil was down again Wednesday despite a small drop in U.S. crude stocks reported by the government. The key price level remains at around $44 for U.S. crude futures. If nearby futures fail to hold $44, they could be headed down to test support at around $41.

There’s technical support at 2112 for the SPX, with resistance at 2147.

S&P 500

FIGURE 1: AH, CALMER MARKETS.

The S&P 500 (SPX), plotted through Wednesday's close on the TD Ameritrade thinkorswim® platform, had a mostly uneventful day Wednesday after some wild swings earlier this week. The index remains up 4% year to date. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Third Time’s the Charm for Bayer; Are More Huge Mergers Ahead? Bayer’s third bid for giant seed company Monsanto (MON) reached $66 billion, and apparently that was enough to seal the deal, though U.S. regulators still have to approve the merger. Last year was a record for worldwide mergers and acquisitions, surpassing $5 trillion. This year has been something of a different story, with some companies walking away from the huge M&A deals they had previously struck. Until the $66 billion Bayer/Monsanto deal announced this week, the largest merger of the year involving a U.S. company hadn’t exceeded $30 billion, and it’s unclear if this new deal could start any sort of trend. The Bayer/Monsanto deal is by far the biggest of 2016, and it’s no surprise that it’s a European company buying a U.S. company. That’s because the strong U.S. economy in relation to Europe’s struggling economy makes the U.S. an attractive country for European companies seeking acquisitions, The Wall Street Journal said.

Piggy Banks Could be Getting Fuller: Those extra coins rattling around in peoples’ pockets may signal more than just a rise in the potential market for bubble gum machine vendors. U.S. median household incomes rose more than 5% last year, the first rise for families in seven years. The median U.S. income is now $56,516, the Census Bureau said. There are many explanations being offered for this somewhat surprising data, but let’s look instead at the implications. Most of this year, it’s been consumers who’ve kept the economy going despite tepid overall growth in gross domestic product (GDP). With some exceptions, sales of big-ticket items like automobiles and washers and dryers seem pretty strong, and that may reflect the consumer’s added spending power. It’s too soon to draw conclusions based on the median income data alone, but keep an eye on employment data in coming months to see if wages keep inching up, as they have been, because that could be a sign that consumer strength might continue.

Fed Rate Hike Chances Fall But Yields Rise; What Gives? Odds of a September rate hike, which climbed above 30% earlier this month before the disappointing August jobs report, were down to 15% on Wednesday, according to CME Group futures. But U.S. 10-year Treasury yields, which had traded below 1.6% through most of the summer, were up around 1.68%. Typically, yields rise when a rate hike looks imminent, but this week it’s been the opposite pattern, with yields rising even as futures prices signaled less chance of a hike. Could this mean the high-flying bond market, which moves the opposite of yields, could be losing some of its simmer after the long rally? Time will tell.

Good Trading,
JJ
@TDAJJKinahan

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