August 12, 2016

Stocks gapped down at the open but have pared losses. The Dow and SPX are currently off 40 pts & .1%, respectively. All three major averages (SPX, Dow, Nasdaq) hit all-time highs yesterday. Energy, utilities and consumer staples sectors are leading the way. Financials, industrials, healthcare are lagging. The VIX Index continues to fall, now trading around 11.4 and suggests very little market volatility over the next 30 days. The same is true for the VXTLT, which measures fear in the long-term Treasury bond market. The dollar is lower today and WTI crude oil is up again to $44/barrel. Bonds are slightly higher as yields dip. The 5- and 10-year Treasury yields are at 1.08% and 1.49%, respectively. Yields have been hovering in a tight range for the past month. 

So far this month the S&P 500 Index (SPX) is up .66%, the Russell 2000 index (RTY) is up .94% and the Nasdaq Composite (CCMP) is up 1.4%. So much for all the deafening calls for a terrible August. 

US retail sales fell flat in July after rising .8% in June. Autos did well in July and gasoline prices fell. So if you strip out those categories, retail sales fell .1% in the month.  Sporting goods, restaurants, supermarkets and building materials were weak. As a side note, this retail sales report includes only receipts at retail & food service establishments, NOT spending on services. On a year-over-year basis, retail sales decelerated a bit to 2.3% growth from 3.0% in June. Sales growth has meandered in the range of 2-3% for the past year-and-a-half. 

The Producer Price Index (PPI), which measures wholesale inflation, fell .2% y/y in July vs. +.3% expected. Excluding food & energy, core PPI is running at a very weak .7% y/y rate. Economists expected something closer to 1.3%. Apparel, food, hard goods, construction services and autos saw softer wholesale pricing. So neither retail sales nor PPI is suggesting the Federal Reserve needs to consider rate hikes in the near future. These reports are a modest disappointment and indicate the economy has come off of June’s clear strength. 

The International Monetary Fund (IMF) projects China’s economy will continue slowing until 2021. GDP growth, estimated at 6.6% this year, will decelerate below 6% by 2020. Growth will trend lower as part of the government’s ongoing transition from an export-led economy to a consumer-led economy. Major risks to a stable transition include 1) massive credit growth, 2) the government’s continued support of large state-owned enterprises, and 3) weak financial governance.  

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