March 14, 2018

The stock market opened lower this morning (Dow -274 pts; SPX -.46%; Nasdaq -.35%) on some weak retail sales data as well as continued trade war fears. Cyclical sectors are leading to the downside, with industrials down over 1%. Utilities are in the green but stand alone. Since President Trump’s proclamation on import tariffs, fears over a potential trade war have stifled the industrials sector (down 2%), and the materials sector (down 1%). Boeing (BA) is down over 3% today. Oil is holding steady at $60.70/barrel. Bonds are rising in prices as yields tick lower. The 5-year Treasury yield is hovering around 2.62% and the 10-year is at 2.82%. Over the last month, the yield curve has flattened. The difference between the 2-year and 10-year yields is back down to .56%. That’s because recent economic reports show inflation is very tame but investors believe the Federal Reserve will go ahead with three interest rate hikes this year. 

We got some encouraging economic data from China. For the first two months of 2018, factory output rose 7.2% from year-ago levels. Fixed asset investment shot up 7.9%. Exports (up 44.5% y/y) and retail sales were also strong. US demand for imported Chinese goods remains robust. Most economists are expecting Chinese economic growth to decelerate to 6.5% this year. So these numbers are a bit of a surprise. 

US retail sales dipped .1% in February from prior month levels, whereas economists expected a gain. The reason: autos and gasoline. Consumer spending at gas stations fell 1.2% from year-ago levels because oil prices didn’t rise as much as they usually do in February. So that’s good news, right? Auto sales fell .9% in the month and are typically volatile month-to-month. Excluding autos and gas, retail sales rose .3% as expected. If you measure retail sales on a year-over-year basis, the headline growth rate is 4.0%, slightly better than in January. So why does Bloomberg say we’re in a “retail slump” and that “spending is foundering”? Their view is focused on the short-term, pointing out that consumer spending’s contribution to first quarter economic growth (“GDP”) won’t be very strong. Longer-term, however, Bloomberg “remains constructive on the outlook for consumer spending” because the job market is so strong. 

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