The Week In Review

8/12/16

The stock market ended a flat week on a similar note as disappointing readings of July retail sales (0.0%; Briefing.com consensus +0.4%) and July PPI (-0.4%; Briefing.com consensus 0.0%) stalled the major averages in record territory. The S&P 500 (-0.1%; week-to-date: +0.1%) ended the week flat while the tech-heavy Nasdaq Composite (+0.1%; week-to-date: +0.2%) finished slightly ahead of the broader market.

The benchmark index meandered in a narrow seven-point range, pressured by weaker-than-expected economic data. The Retail Sales Report for July offered a disappointing preview of consumer spending for the third-quarter. Recall that consumer spending was a strong point for second-quarter GDP growth. The negative reading also contributed to a downward revision to the Atlanta Fed's GDPNow forecast for the third quarter (to 3.5%; from 3.7%). Separately, the Producer Price Index for July (-0.4%; Briefing.com consensus 0.0%) also came in below consensus, indicating a continued lack of upward pricing pressure.

Retailers managed to shrug off the weaker-than expected retail sales report, focusing on better-than-expected earnings results from J. C. Penney (JCP 10.55, +0.61) and Nordstrom (JWN 51.38, +3.82). The two department store names beat bottom-line estimates, extending the rally in the broader SPDR S&P Retail ETF (XRT 45.51, +0.25). Today's trade also featured a rally in crude oil futures, softening in the dollar, and the underperformance of the heavily-weighted financial (-0.2%), health care (-0.2%), and industrial (-0.3%) sectors.

The S&P 500 (-0.1%) settled in the middle of today's trading range as seven sectors ended in the red. The commodity-sensitive energy sector (+0.7%) led amid a 2.2% ($44.46/bbl; +$0.96) gain in crude oil futures. Conversely, industrials (-0.3%), telecom services (-0.4%), and materials (-1.2%) rounded out the leaderboard.

The Dow Jones Transportation Average (-0.5%) finished behind the benchmark index as airlines weighed. Southwest Air (LUV 36.52, - 0.72) remained pressured after cutting its third-quarter revenue per available seat mile guidance on Wednesday. The stock declined 3.5% this week, which compares to a loss of 0.8% in the broader Transportation Index.

The heavyweight financial sector (-0.2%) displayed relative weakness as expectations for a rate hike by the end of the year diminished. The fed funds futures market currently estimates the likelihood of an interest rate hike at the December meeting at 38.7%. This compares to yesterday's implied probability of 51.9%. The shift in rate hike expectations also contributed to a bid in Treasuries, which also pressured the economically-sensitive sector. The financial space finished the week lower by 0.6%, returning to negative territory for the year (-0.1%).

In the health care sector (-0.3%), Dow component Merck (MRK 63.35, -0.28) extended its week-to-date loss to 0.8%, pulling back from last Friday's 10.4% rally. On the flipside, Anthem (ANTM 130.19, +1.99) and Cigna (CI 133.31, +6.69) outperformed. The names rose after reports indicated that settlement offers might be entertained in their antitrust case. The U.S. Department of Justice moved to block their proposed merger on July 21.

The PHLX Semiconductor Index (+0.5%) outperformed as NVIDIA (NVDA 63.04, +3.34) led the price-weighted index. The company reported above-consensus quarterly results last evening. In the broader technology sector (-0.1%), Microsoft (MSFT 57.94, -0.36) underperformed after CEO Satya Nadella disclosed the sale of 143,000 shares. Separately, Coatue Management reported that it reduced its position in the Dow component, cutting its equity exposure to ~4.9 million shares from ~10.8 million.

The U.S. Dollar Index (95.74, -0.12) recovered some early losses as the greenback trimmed its decline against the euro and the yen. The euro ended higher by 0.2% against the buck (1.1161) while the dollar/yen pair finished lower by 0.7% (101.29).

Treasuries ended higher, benefiting from declining rate hike expectations. The yield on the 10-yr note settled lower by five basis points (1.51%). Separately, the yield on the 2-yr note slipped four basis points to 0.71%.

Today's participation was below the recent average as fewer than 693 million shares changed hands at the NYSE floor.

Today's economic data included July PPI, July Retail Sales, the preliminary reading of the Michigan Sentiment Index for August, and Business Inventories for June:

The Producer Price Index for July featured a 0.4% decline in the final demand index (Briefing.com consensus 0.0%) following a 0.5% increase in June.

The downturn in July was paced by prices for final demand services, which fell 0.3%.

The index for final demand goods, meanwhile, decreased 0.4%.

On a year-over basis, the final demand index is down 0.2% versus a 0.3% increase seen in June.

Excluding food and energy, the final demand index declined 0.3% on the heels of a 0.4% increase in June.

That left the index up 0.7% year-over-year, which is a slowdown from the 1.3% growth rate seen in June.

The Retail Sales report for July showed no change in total retail sales (Briefing.com consensus +0.4%) after an upwardly revised 0.8% increase (from 0.6%) in June.

Excluding autos, retail sales declined 0.3% (Briefing.com consensus +0.2%) following an upwardly revised 0.9% increase (from 0.7%) in June.

Gasoline station sales (-2.7%) were the main drag and helped break a string of three consecutive monthly increases in retail sales.

Other weak spots included sporting goods, hobby, book and music stores (-2.2%), food and beverage stores (-0.6%), building material and garden equipment and supplies dealers (-0.5%), clothing and accessories (-0.5%), food services and drinking places (-0.2%), general merchandise stores (-0.1%), and electronics and appliance stores (-0.1%).

Motor vehicle and parts dealers (+1.1%) provided an influential offset of sorts, but by and large there was a slowdown in sales across most categories following some relatively strong sales performances in June.

Core retail sales, which exclude auto, gasoline station, building material, and food services sales, and which factor into the goods component for personal consumption expenditures in the GDP report, were flat.

Total business inventories increased 0.2% in June (Briefing.com consensus +0.1%) following an unrevised 0.2% increase in May.

The key takeaway from the report is that business inventories continue to remain at an elevated level relative to sales.

This points to ongoing difficulties in achieving pricing power and perhaps some more conservative approaches to increasing inventory investment.

Manufacturers' inventories (-0.1%) and wholesaler inventories (+0.3%) were already known.

The total business inventory-to-sales ratio for June dipped to 1.39 from 1.40 in May, yet that was still above the 1.37 ratio seen in the same period a year ago.

The preliminary reading for the University of Michigan Index of Consumer Sentiment for August checked in at 90.4 (Briefing.com consensus 90.2) versus the final reading of 90.0 for July.

From our vantage point, the key takeaway from the report is that there wasn't any significant change in consumer sentiment.

This comes despite the stock market rally and the stronger-than-expected employment data seen for July and August.

The improvement in August was fed by the Index of Consumer Expectations, which jumped to 80.3 from 77.8 in July.

The Current Economic Conditions Index, meanwhile, dropped to 106.1 from 109.0.

Monday's economic data will include Empire Manufacturing for August (Briefing.com consensus 4.0) and the August NAHB Housing Market Index (Briefing.com consensus 59), which will be released at 8:30 ET and 10:00 ET, respectively. The day's data will be capped off with the 16:00 ET release of Net Long-Term TIC Flows for June.

Week in Review: Inching Higher

The stock market ended the second week of August on a flat note, but not before creeping into record territory. The Dow, Nasdaq, and S&P 500 set new intraday record highs, finishing the week just above their flat lines. The S&P 500 added 0.1% while the Dow and Nasdaq climbed 0.2% apiece.

The past week was not particularly exciting as summer doldrums set in, leading to narrow ranges and limited trading volume. To that point, average daily NYSE floor volume checked in at just 728 million shares, which was well below the 20-day average of 808 million.

A few more quarterly reports crossed the wires during the week with retailers receiving some added focus. The likes of Macy's (M), Nordstrom (JWN), Kohl's (KSS), and Ralph Lauren (RL) enjoyed big gains after beating expectations, but Friday's release of the July Retail Sales report told a different tale. The report showed that retail sales were unchanged in July (Briefing.com consensus +0.4%) after being up 0.8% in June (revised from 0.6%). Excluding autos, retail sales declined 0.3% (Briefing.com consensus 0.2%) to follow a 0.9% increase in July (revised from 0.7%).

All in all, rate hike expectations, estimated by the fed funds futures market, have receded a bit more. The implied probability of a hike in March 2017 ticked down from last week's 51.2% to 50.1%.