April 13, 2016

The major stock market averages gapped up at the open (Dow +147 pts; SPX +.8%) despite weak retail sales data. The financials sectors is leading (+1.4%), which is a good sign since most Wall Street analysts have been predicting ruin. The tech sector is up 1% in early trading. On the other hand, the defensive sectors (staples, utilities, telecom) are lower on the day. We’ve seen these sectors lose momentum over the last 6 weeks. The dollar is stronger on the day and oil prices are flat. WTI crude oil is trading at $42/barrel. We got some positive China economic data, so iron ore and copper continue to rally. Bonds are selling off again today. The 5- and 10-year Treasury yields are up to 1.23% and 1.79%, respectively. If this earnings season proves anything but disastrous, yields will continue to rise.

Bloomberg ran an article addressing suspicions that the Chinese government is faking economic data. This, of course, has been widely discussed by investors over the last several years. Bill Gross, the renowned bond investor, has referred to China as the “mystery meat” of emerging-market countries. “Take the last six quarters of gross domestic product growth, which went like this: 7.1%, 7.2%, 7.0%, 7.0%, 6.9% and 6.8%. On average, the GDP growth rate has changed 0.2 percentage points each quarter since 2011, less than half of the mean for the rest of the world’s top 10 economies.” In other words, the quarter-to-quarter changes are too smooth to be believable. China’s National Bureau of Statistics has pledged to strive for better quality data. But while data collection in such as large emerging economy is difficult, investors wonder whether the GDP figures are manipulated to meet official government growth targets. On Friday, we’ll get China’s first quarter GDP report; the forecast is for 6.7% growth.

JP Morgan (JPM) just did the thing Wall Street said couldn’t be done. The bank reported first quarter revenue and earnings that beat expectations. Loan growth was pretty strong, management did a good job of cost control, and there was a smaller than expected decline in securities trading revenue. CEO Jamie Dimon said, "The consumer businesses continue to grow loans and deposits impressively, attracting deposits faster than the industry." Not everything was positive: investment banking was down 24% and fixed income trading revenue was down 13%. Loan loss reserves were increased again to deal with potential defaults within the energy & mining sector, but the problem looks manageable. The bank raised its share buy-back program by nearly $2bil. The stock is up 3% today. It’s pretty clear the analysts got unrealistically bearish coming into earnings season, and now they have to re-rate the entire banking sector.

US retail sales disappointed with a -.3% decline in March from prior month levels. Auto sales were down 2% in the month; retail sales excluding gasoline were down .4%; restaurant sales fell .8%. Now, let’s take a look at the year-over-year growth figures. Headline sales are up a mere 1.7% y/y, having decelerated from the 3.7% growth rate in February. That’s a huge down-shift and makes me wonder if there is an anomaly in the data. Sales excluding gasoline and autos look a little better, at +3.9%, but that’s still a deceleration from February levels. The bottom line is that this report is not inspiring.  

The Producer Price Index (PPI), which measures wholesale price inflation, fell .1% y/y in March. So despite recent improvement, deflation lingers. (Back in the fall of 2015, PPI was falling at a 1.5% y/y pace.) Of course, much of this is due to the collapse of commodity prices. If you strip out food and energy, PPI is up .9% y/y. Still very low. Perhaps there is a lag, but we’re not yet seeing a big impact from oil’s rebound to $40/barrel.  

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