S&P 500 and Nasdaq stock indices surged to new highs for the year this morning. Banks rallied ahead on better earnings, reversing year-t-date declines. Strong underlying retail sales data was generally viewed as positive (a strong economy being good for corporate profits, but bad for future rate cuts.) Bonds fell. We saw positive money flow today into the broader commodity sector, softs and oil, spurred by strong demand and tight supply.
Bottom-line: Risk-on.
TODAY’S MAJOR NEWS
Core retail sales remain robust
Headline retail sales suggested that economic activity slowed a bit in June, pretty much as expected. However, core retail sales were still pretty strong, and in the end, we saw a bit more strength in the dollar and rising Treasury yields on ideas that the data may end up keeping the Federal Reserve hawkish a bit longer, as growth refuses to slow.
- Headline retail sales rose 0.2% month-on-month in June, less than 0.5% expected, and down from an upwardly revised 0.5% growth in May
- However, ‘core’ retail sales – ex autos, gasoline, building materials and food services – rose by 0.6% in June after an upwardly revised 0.3% growth in May
Big banks beat the street
Bank of America’s Wall Street unit reported better revenue (up 11%) and net income (up 19%) than expected. Bank of America, JP Morgan Chase, and Wells Fargo showed it was able to earn more money from its commercial loans despite paying more for deposits, and for their investment banks to benefit from dealmaking and trading in tough capital markets. Bank of America, JPMorgan, Wells Fargo and Citigroup all reported improved net interest income, a key measure of profitability. Smaller regional banks are expected to revise down expectations of net interest income as the struggle with rising funding costs.
China crisis threatens Yuan stability
China is focused on boosting domestic demand, as Western nations de-coupling continues to hurt its export-oriented economy. China’s central bank recently asked commercial banks to lower interest rates on existing home mortgages to give the consumer more discretionary spending power to spur domestic demand. However, China’s options for stimulating its economy appear to be limited while trying to protect the stability of the yuan. A mounting debt problem among its local governments, and caution in stimulating too much could weaken the yuan at a time when other major currencies are in a monetary tightening environment. The yuan has fallen 7% versus the dollar in the year-to-date and maintaining its stability has become a key policy objective.
Grain deal done?
The Black Sea Grain Initiative ended with a bang as Russia attacked one of the previously approved port areas. Russia claims it hit a fuel storage facility in Odessa, along with a manufacturing plant said to be making seaborne drones as a retaliation against the recent attack on the Kerch bridge that connects Crimea to Russia. Ukraine is looking to move ahead as normal without Russia’s participation, and has an insurance fund available to supplement coverage costs for shippers if they are willing to take the risk. It will be interesting to see if there any takers.
TODAY’S MAJOR MARKETS
Equity markets
- Markets rallied in morning trade, with the Russell 2000 again leading the way up 1.0%, while the S&P 500 and Nasdaq were up 0.5% and 0.4%, respectively
- The KBW Bank Index was up 2.7%, reversing a 15% decline in the year-to-date
- Global markets were up modestly, with the FTSE 100, DAX and Nikkei 225 up 0.6%, 0.4% and 0.3%, respectively
- The VIX, Wall Street’s fear index, was unchanged at 13.5
Currencies and Bonds
- The dollar index was flat against a basket of currencies to 100.0
- Euro, Sterling and Yen cross rates were all unchanged
- Bonds fell, with yields on 2- and 10-year Treasuries rising to 4.75% and 3.78% respectively
Commodities
- Crude oil prices were strong once again, up 1.7% to $75.4 per barrel
- Gold prices and Silver were both up 1.4%, to $1,984 per ounce and $25.4 per ounce, respectively
- Soybeans were strongest soft commodity, with supplies generally expected to remain tight over the next six months
- Corn and wheat found some support from indications that Russia may not make it easy for Ukraine to continue the grain initiative without it
Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]
Market outlook by Paul Walton, Financial Writer: [email protected]
