(Monday Pre-Market) A stormy week is over, but the days ahead promise plenty of excitement with fast-moving geopolitics and major retail earnings likely to stay on the front page.
Since everyone probably knows the international policy situation, let’s focus on some of the data and earnings reports coming up over the next few days. Topping the list are a host of earnings from some of the biggest of the “big boxes,” with Home Depot (HD) before the open Tuesday, Target (TGT) ahead of Wednesday’s opening bell, and Wal-Mart wrapping things up Thursday morning.
Retail results last week came in mixed, but department store earnings are a different animal from the big boxes, so we have to be careful about comparisons. Companies like the ones reporting in the coming days aren’t weighed down as much by falling traffic to shopping malls, simply because their stores are mainly stand-alone. They’re also selling a different mix of goods, and tend to have very strong online platforms. Online sales, as always, are likely to bear close watch.
Consumers do seem to be out there spending, as better than expected sales from some of the department stores last week showed. Sales fell less quickly than some analysts had projected at Macy’s (M) and Kohl’s (KSS), and actually rose at Nordstrom (JWN), all of which is encouraging news for the economy.
On a broader level, Tuesday’s government retail sales report for July is going to be an important one to watch. Retail sales have fallen month-to-month in three of the last five months, dropping 0.2% in June. With inflation still muted according to government data last week, it’s an open question how retail sales fared in July.
Among the interesting aspects of the June retail sales report were big gains in sales of durable goods like building materials, so keep an eye on the details to see if that carried through into July. Demand for durable goods tends to signal improvement in the overall economy. Food sales, which are more vulnerable to near-term inflation trends, helped bring down the overall retail sales number in June.
The other key economic data in the coming week is housing starts and building permits, due Wednesday.
By early Monday, most overseas markets were on the rebound, with the exception of Japan’s Nikkei. U.S. stocks rose in pre-market trading. While concerns of possible conflict between the U.S. and North Korea hadn’t disappeared, it seemed like investors were focusing less on the issue. The VIX fell sharply, back below 14, while gold prices pulled back and bond yields rose slightly.
This doesn’t mean all the fear is gone. Geopolitics remains front and center. If there’s one thing markets don’t like, it’s uncertainty. World events provide plenty of that at the moment, and it could be hard for stocks to mount much of a rally in this environment. The question is whether there’s more saber rattling in the days to come, or if some sort of diplomatic solution moves into view. All investors can do is wait.
While it’s good to be cautious at times like these, fear is something investors might want to avoid. Past isn’t prologue, but history shows that geopolitical events haven’t had too big an impact on the markets, according to The Wall Street Journal. Even the 1962 Cuban Missile Crisis only sent the Dow Jones Industrial Average ($DJI) down 1% for the week.
Hot Dog! If you ate a red-hot at the ballpark this summer, you likely paid up for it. The July consumer price index (CPI), as always, had a detailed breakdown of which products rose and fell in price, and frankfurter prices climbed 4.5%. On the other hand, if you threw a backyard barbecue, your pork chops might have cost less than usual. Pork chop prices fell 7%, the Labor Department said. Doing some home improvement? Lamps, clocks, and “decorator items” cost 10% less in July. It’s amazing to see all the products the government tracks, but the overall takeaway is that inflation is still rising at a lower rate than the Fed’s target of 2%. Core inflation, which strips out food and energy, is up 1.7% over the past year, unchanged from June. The Fed has called this a temporary phenomenon, but there’s still no sign of higher prices.
Prediction Game: There’s a lot of talk out there about how the market hasn’t had a pullback in a while and might be due for one, but just because we haven’t had a major decline in stock prices since last year is no reason to over-react. It’s easy to say the market is due for a pullback, but that doesn’t mean it has to happen. Markets don’t do anything because they “have to,” or because historic data indicate they’re likely to. Geopolitics and major retail earnings over the next week will likely have more to do with the market’s near-term performance than any sense of history.
About That Third 2017 Rate Hike: Last week’s mild inflation data likely worked itself into falling predictions for another Fed rate hike this year. Odds for a hike by the end of December now stand at about 35%, down from 50% not too long ago, according to CME Group futures. The 10-year Treasury bond yield fell toward the recent low end of its long-term trading range at 2.2% by midday Friday. Some analysts think the Fed is likely to put out more detail next month about its planned balance sheet reduction and then see how the market reacts once that starts. However, with inflation this light, there’s not much pressure on the Fed to hike rates. The next few months of inflation data remain important to watch, but it’s getting very unclear whether the Fed will be able to live up to its prediction of three 2017 rate hikes. Failure to do so would make this the second year in a row when the Fed ended up more dovish than originally expected.
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