July 15, 2016

Stocks gapped up at the open but quickly faded. The Dow and SPX are currently flat & -.24%, respectively. Biotechs are leading the way, up over 1% in early trading. Most everything else is down. The VIX Index sank under 13 this morning and VIX August futures are trading around 16. Traders still aren’t quite sure this rally has legs in the near term. The dollar is stronger but commodities are not uniformly lower. Copper is up .5% and WTI crude oil is trading up around $46/barrel. Bonds are selling off again as yields head higher. The 5- and 10-year Treasury yields are up to 1.15% and 1.60%, respectively. Why? There is less pressure on European sovereign bond yields. The German 10-year Bund just climbed above 0% for the first time since June 24th. We got a Eurozone report on inflation, which rose .1% y/y. At least it’s positive. 

Retail sales surged .6% in June from prior month levels, although May sales growth was downgraded to just .2%. Taken together, both months look OK. Vehicle sales were a drag in May and were flat in June. Department stores saw a rebound in sales and non-store retailers were strong. Building materials & gardening equipment surged 3.9%. On a year-over-year basis, retail sales were up 2.7%. Economists like to look at sales excluding autos and gasoline to gauge underlying trends in consumer spending, and by that measure things look fairly strong. Here is Barron’s take: “The job market is healthy and the consumer is alive and spending.” 

The Consumer Price Index (CPI), which measures retail inflation, held steady at 1.0% y/y growth in June. CPI remains restrained by oil prices that are about 11% lower than year-ago levels. Here again, economists generally prefer to look at CPI excluding food & energy to better gauge core inflation. On that basis, CPI accelerated to 2.3% y/y growth in June from 2.2% in the prior month. The Federal Reserve’s long-term core inflation target is 2%. Prices are beginning to rise.

CNBC interviewed equity strategist Tony Dwyer about why he’s bullish on stocks. First, “leading indicators are ramping,” and we’ve seen better economic data here in the US (i.e. ISM services, jobs). Also, he noted money supply in China is rising and the financial system looks more stable. He predicted top-line growth (revenue growth for US companies) will return shortly. 

Wells Fargo (WFC) reported second quarter results in line with expectations. Total revenue grew 4% from year-ago levels but earnings were down 2%. Deposit and loan growth were OK though not inspiring. Interest rates remain ultra-low throughout the economy and Wells’ net-interest margin fell a few basis points to 2.86%. The bank also held back more reserves than expected against possible loan losses. It appears some loans to energy companies have soured. The stock is down about 2.5% this morning.   

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