In last week’s edition, I spoke about Monday being a pivotal day as a rally was needed to erase the odds of a potential correction. We got that Monday rally and it was a pretty healthy one, too. However, as the week progressed the stock market reversed (again) and made new lows (which is bad). After seeing this see-saw action, I am convinced that the odds (80% or so) of a near term correction are back on track as the markets have shown their weak hand in the face of uncertainty coming from Washington.
If you read my posts from earlier this year, you will remember that I wrote about the potential for markets to be disappointed if there was a lack of policy changes by this Fall (taxes & healthcare). The stock market has meandered higher these past several weeks marked by low volatility which we can interpret as “not expecting anything bad to happen”. Well, the market may begin to price in this disappointment in the coming weeks. Remember, the rally that ensued after the Presidential election (the “Trump Bump”) was based on many changes to policy that were business friendly. In other words, the stock market priced in many or all of these policy changes to be implemented by the end of 2017 which I think we can safely say isn’t going to happen. If we get one change, that would be a victory.
If we see weak stocks price action early next week, then you know this correction is back on track. Maybe 5-10% but its difficult to know exactly how far these things to go. By the way, the Fed meeting in September is another pivotal item on the calendar as they are likely to announce plans of withdrawing stimulus – akin to removing the punch bowl for the stock market.
Economic & Central Banking Snippets
- Minutes from the July 25-26 meeting released Wednesday reveal growing concern among some officials that recent soft inflation numbers could be a sign that something has fundamentally changed in the economy, leading them to suggest holding off on raising rates again for the time being. New doubts over sagging inflation in the past few months are driving a split at the Federal Reserve about the timing of the next increase in interest rates. The internal debate raises the possibility that the Fed could deviate from its plans for a third rate increase this year. Soft inflation has bedeviled Fed officials, forcing them to pull back on plans to raise rates multiple times in 2015 and 2016.
- Retail sales rose a healthy 0.6% in July, with autos up 1.2%, gas stations down 0.4%, home improvement store sales up 1.2% and the core retail control gauge excluding those categories by rising 0.5%. Gains in July were broad-based, with the strongest showing for the “miscellaneous” category which includes office supplies and gift stores. (MS)
- Restaurant same-store sales fell 2.8% in July, according to data from Black Box Intelligence. Comparable traffic was down 4.7%, a 170 bps decline from the pace seen in June. Blackbox read: “….These are the weakest two-year growth rates in over three years, additional evidence that the industry has not reversed the downward trend that began in early 2015.”
- The apartment-construction boom is coming to an end, and builders aren’t ramping up single-family construction quickly enough to fill the void. Developers for the past several months have slowed down on new apartment projects, reversing a five-year trend in which rental construction boomed while for-sale home construction has lagged behind. Overall U.S. housing starts declined for the fourth time in five months in July, the Commerce Department reported Wednesday. Total housing starts decreased 4.8% from the previous month to a seasonally adjusted annual rate of 1.155 million. While starts edged 0.5% lower for single-family construction, they plummeted 17.1% for construction on buildings with five or more units. (MS)
- Brazil has abandoned its fiscal targets for this year and through 2020, after a bribery scandal crippled President Temer’s ability to push economic reforms through Congress and left the public sector with a gaping budget hole. That means Brazil’s government debt burden, already the heaviest of any major Latin American economy at 73.1% of GDP, is set to continue rising fast in the coming years. (Seeking Alpha)
- The eurozone’s top central bankers are concerned about the strength of the euro, minutes of the European Central Bank’s July policy vote reveal this week. The problem facing the ECB is especially acute at a time when it is looking to make a decision on tapering its €2T quantitative easing program.
- A strong euro complicates the ECB’s efforts to hit its inflation goal of just under 2% by making imports cheaper and weighing on export growth.
Politics! Politics! Politics!
- President Trump took a step in his effort to ramp up trade pressure on China, directing aides to explore the prospect of sanctioning Beijing for the “unfair” acquisition of American high technology. The directive, signed in a ceremony in the White House’s Diplomatic Reception Room, was the first formal China trade action taken by a president who has long blasted the country for improperly aggressive commercial practices. (WSJ)
- As the Korean cauldron nears its boiling point, China is escalating trade sanctions against North Korea. On Aug. 14, China’s Commerce Ministry announced it will cease imports of North Korean coal, iron ore, lead and seafood. The move signals compliance with the package of sanctions levied against North Korea by the U.N. Security Council on Aug. 5 over the country’s nuclear program.
- Negotiators from Canada, Mexico and the U.S. kicked-off an ambitious first round of trade talks this week as the countries try to fast-track a deal to modernize NAFTA. The timeline is for seven rounds of negotiations between now and the beginning of next year. U.S.-Canada-Mexico trade has quadrupled since NAFTA took effect in 1994, surpassing $1.2T in 2016.
- Amazon sealed the year’s fourth-largest corporate bond sale on Tuesday as the technology and online retail group locked in $16B to fund its takeover of premium grocer Whole Foods. The company borrowed the $16B across seven tranches, ranging from three- to 40-year maturities. Orders for the multibillion-dollar deal climbed to nearly $49B as banks closed their books, according to two investors following the sale. The move follows a blistering few weeks of corporate debt issuance with sales from AT&T, British American Tobacco and Tesla flooding the market. All told, companies have raised nearly $1.2T through US debt markets this year, a record pace, according to Dealogic, a data provider.The latest jumbo sales have added pressure to the broader credit market, which had weakened alongside a defensive shift in equity markets. “What was shocking to me last week was that even as there were cracks in the investment-grade market . . . [Wall] Street was still bringing new issues to market every day,” said Andrew Forsyth, a portfolio manager with BNP Paribas Investment Partners. “It had been a while since we’ve seen underwriters so active when the market did not feel right.”
- After Puerto Rico, credit rating agencies are increasingly sounding the alarm over debts issued by the United States Virgin Islands – another US territory whose bonds are causing consternation among investors. On Wednesday S&P Global lowered its rating on notes issued by the island’s Public Finance Authority’s gross receipts tax loan notes to triple-C from Bminus, pushing them deep into junk territory. At the same time S&P downgraded its opinion of the authority’s matching fund notes to triple-C plus from single-B.
- FDIC sues Barclays, RBS and other banks over Libor The US has taken the unusual step of suing European banks in a London court over the Liborrigging scandal after parts of a similar New York lawsuit failed. The lawsuit comes as the death knell has been sounded for what the British Bankers’ Association previously dubbed as the “world’s most important number”. (FT)