The Averages (DJIA 25299, S&P 2839) got a bounce yesterday, though volume was flat and breadth just barely improved. Nevertheless, they remain strong technically; and as I noted previously, last Friday’s gap down will almost surely be closed. Another mildly positive sign is the retreat of the VIX which fell back below its 200 day moving average, negating Monday’s break. On the other hand, the Dow’s 100 DMA continues to sit right on its 200 DMA. A cross to the downside would be a negative signal.
And this on the VIX.
TLT’s battle with its long term uptrend’s lower boundary remains on hold as it has become a safety trade while investors try to digest the turmoil in the currency markets. The question remains, is the Turkish (emerging markets; see below) crisis a short term problem (and the Market’s focus will return to the earlier dispute over the long term direction of interest rates) or is it a sign of more dollar funding problems for the global banking system (in which case it will remain a safety trade)? The Turkish lira did manage a bounce yesterday and TLT declined slightly in sympathy. But this story isn’t over. Stay tuned.
The dollar rose again likely reflecting its function as a safety trade (must read):
GLD managed a meek rally but continues in a solid downtrend.
Bottom line: investors got some relief from the deteriorating currency problems in Turkey (emerging markets); though at this moment we don’t know if that was just a dead cat bounce or a sign that investors have decided that this is not such a big problem after all. Until there is some clarity, most of the indicators that I follow will likely continue to be effected by the need for safety. On a shorter term basis, the downside gap in the Averages will likely be closed.
Yesterday in the charts.
The US economic indicators released yesterday were mildly upbeat: the June small business optimism index was ahead of forecasts, while both import and export prices were below expectations, export prices dramatically so---which makes little sense in a rising dollar environment. On the other hand, month to date retail chain store sales grow slowed.
Overseas, the reverse was true: July Chinese retail sales, industrial production and unemployment were all disappointing; as was June Japanese industrial production. In the UK, unemployment was less than consensus, but home prices fell for the fifth month in a row.
Turkey remained on investors’ minds yesterday; though clearly the rally in the lira relieved some anxiety.
The other development worth mentioning was that the retail sector has started reporting second quarter earnings; and, so far, they have been positive. While this data is clearly backward looking, it is still a sign that the consumer is healthy and spending. (however, July retail sales were up; see below) Given that consumer spending accounts for a large part of total GDP, this latest data is encouraging. On the other hand, household debt is at record levels suggesting that the best in spending growth may be behind us. Plus, we already know that most economists (including the CBO) are looking for slowdown in the second half of 2018, lasting at least into 2019.
Q2 household debt and credit report (medium and a must read):
Bottom line: there is no question that a strong Q2 performance by the retail sector confirms the good GDP report. This question is, is this a harbinger of things to come? At the moment, I doubt it because (1) there are plenty of other datapoints indicating that GDP second quarter got a one-time boost from the tax cut and that is it, (2) the stats so far in the third quarter confirm that scenario, (3) as do economists in general, and (4) those household debt numbers. Remember, I am not suggesting a recession. I am simply saying that the second quarter retail earnings in retrospect will likely appear less positive than they do now.
The issue remains as to whether or not the current dollar funding shortage is or soon will spread beyond a couple of small, poorly run countries. I am not smart enough to know the answer. But this is a potential problem that I have been focusing on for months; and it will probably only get worse, the tighter monetary policy becomes.
News on Stocks in Our Portfolios
Scotiabank (BNS +0.8%) agrees to acquire Banco Dominicano del Progreso, a bank with operations Dominican Republic
BNS's common equity tier one capital ratio will be impacted by ~10 bps; however the deal is not financially material to Scotiabank.
3M (NYSE:MMM) declares $1.36/share quarterly dividend, in line with previous.
This Week’s Data
Month to date retail chain store sales grew slower than in the previous week.
Weekly mortgage applications fell 0.2% while purchase applications declined 0.3%.
July retail sales rose 0.5% versus expectations of +0.1%; however, the June report was revised from +0.5% to +0.2%. Ex autos sales increased 0.6% versus forecasts of +0.4%; but again, June was revised from +0.4% to +0.2%.
The August NY Fed manufacturing index came in at 25.6 versus estimates of 20.0.
Q2 nonfarm productivity was up 2.9% versus consensus of up 2.5%; unit labor costs fell -0.9% versus projections of -0.2%; however, Q1 was revised from +2.9% to +3.4%.
An economic cold war with China (medium):
IMF says a hard Brexit would slow EU growth (short):
What I am reading today
Layers of the brain (medium):
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