MARKET AT THE MERCY OF TRADE HEADLINES

Stocks gapped down at the open this morning, but quickly recovered after President Trump said he would delay planned auto import tariffs hikes. The Dow is currently up 41 pts and the SPX is up .5%. By the way, the Dow had its best day in a month yesterday. Ten of eleven sectors are in the green, led by communications services (+1.6%) and tech (+1%). Banks, on the other hand, are down along with interest rates. The VIX fell back to 17.3 today. Commodities are also trading higher today. WTI crude continues to climb on fears of Iranian terrorism in the Persian Gulf. Bonds are trading higher across the board, forcing yields lower. The 10-year Treasury Note yield is back down to 2.39% and will probably test its near-term support level of 2.37%. One doesn’t normally see stocks and bonds move in tandem. But of course any time geopolitical tensions rise one can expect safe-haven trades like gold and Treasuries to move higher.

US retail sales fell .2% in April from prior month levels and headlines are painting a pretty bleak picture of consumer spending. Apparently, autos and building materials were weak last month. However, March sales were upwardly revised to a 1.7% gain. And on a year-over-year basis retail sales, while slowing a little, grew 3.1%. So while it is true that consumer spending has moderated over the last year, it is not falling off a cliff. And it will not encourage the Federal Reserve to cut interest rates, as some editorials are calling for. Bloomberg’s take is more level-headed: “We are wary of being overly pessimistic about the recent slowdown in consumer activity. Economic fundamentals are sound, and some measures have strengthened relative to periods earlier in the current cycle, particularly domestic activity.”

US industrial production fell in April for a third time in the last four months due to slower production of machinery, autos and auto parts. Manufacturing output fell .5% from prior month levels. Factory activity has been slowing since late last year, and economists are blaming trade tariffs. And since the latest round of tariffs isn’t yet reflected in the data, industrial production could get worse in the near term. Interestingly, another regional factory report—Empire State Manufacturing Index—jumped in May to its highest level since last November. We know that retailers of all sorts stockpiled inventory last year to get ahead of trade tariffs, and as a result they’re ordering less from factories now. So this weakness could be temporary.


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