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US markets sold off into the close after trading higher at the start of the day on a much better than expected July retail sales number.
The S&P 500 finished flat while Canada’s TSX composite fared better, up 0.2% led by financials (+0.56%) and oil and gas stocks (+0.54%) which followed crude higher. WTI prices above US$93 and Brent crude above US$114 helped USDCAD hang on the stronger side of parity, closing at 0.9914, barely changed on the day. EURUSD was barely changed on the day the DXY closed at 82.50.
Bonds were the story today, selling off as markets discounted stronger US economic data and pushing US 10’s to a yield of 1.72% (+6bps) and 5’s to a yield of 0.74% (+5bps). Canadian bonds followed US bonds higher and the Canadian 10-year closed higher by 5bps yielding 1.85%. German 3-years pushed back into positive yield territory and the benchmark 3-year close yielding all of 2.5bps – by no means a meaningful yield, but at least a positive one.
Tuesday's July retail sales number in the US was fairly strong, coming in at 0.8% m/m. It was one of the first outright strong US data prints in quite some time – and the first positive retail sales print in three months. The number implies that the US domestic demand is digging out the ditch that it dug during Q2, but it’s premature to come to any conclusions as consumption is still tracking quite weak.
It is expected to be a very quiet session for economic releases; the UK will provide the bulk of today's data risk. Jobs data for July will come out and consensus is expecting a fairly similar print to June’s +6k change in jobless claims. Minutes from the BoE’s Aug 2 meeting will be released as well. There are rumors flying about a new program to help the housing markets in the UK in the form of monetary stimulus.
Yesterday, eurozone GDP came in a bit on top of expectations via a 0.2% q/q contraction (non-annualized). France didn't contract 0.1% in Q2 as expected and instead posted zero growth; a miss that is statistically inconsequential and that misses the bigger points even if that’s good enough for equities because a worse fate was spared. The reality is that the broad eurozone economy and the GDP of its main anchor economies like Germany and France stalled out as the region remains in a growth recession.
Today two major US data reports will be released. First off, we’ll get a look at US CPI. Expectation is for CPI to remain subdued at 0.2% m/m which would translate into a 1.8% y/y reading. The bottom line on CPI is that most conceivable CPI fluctuations would ultimately translate into subdued year-on-year CPI levels mainly due to fairly soft ‘base effects,’ i.e. low year-ago rates of change in inflation.
The other major release will be US industrial production. As the US had an unusually warm summer featuring a great deal of cooling months, economists are anticipating strong industrial production on heightened utilities output as Americans cranked their air conditioners to the maximum. The risk here is that while the utilities story is likely to support industrial production, a host of other metrics including automotive output looked weak. Consensus is anticipating a 0.5% m/m print.
US housing data is due out over the next few days also, which could help push up the markets and support the USD, markets are expecting strong reports.