Morning Report: Retail sales rise

Vital Statistics:

  Last Change
S&P futures 4,460 -3.2
Oil (WTI) 72.27 -0.45
10 year government bond yield   1.37%
30 year fixed rate mortgage   3.07%

Stocks are flattish this morning on no real news. Bonds and MBS are down.

 

Initial Jobless Claims came in at 332k last week, which was above expectations. It is still a mystery why we are seeing such elevated numbers in the tightest job market I can remember.

 

Retail sales rose 0.7% in August, when the Street was looking for a 0.8% decline. Ex-vehicles and gasoline, they rose 2%, which was well above expectations. August and September are the back-to-school shopping months and this bodes well for the holiday shopping season at the end of the year.

The retail sales number is great news for those who were looking for an acceleration into the end of the year. Consumption is 70% of the US economy. Still, the labor market remains a headwind, especially if it lasts longer. Consumers may be willing to spend, but if the goods aren’t there to begin with then the sales won’t happen.

Consumer sentiment fell slightly in the preliminary reading from the University of Michigan.

 

Home sales fell in August, according to Redfin. Prices still increased 16%, however. “When it comes to home prices in this market, what goes up stays up,” said Redfin Chief Economist Daryl Fairweather. “That’s especially true in the Sun Belt; home prices are up more than 20% from last year in Austin and Phoenix. Even with these steep increases, homes in these areas are still relatively affordable, so these and other hot migration destinations are going to continue to attract homebuyers from the coasts. As workers change jobs en masse and enhanced unemployment benefits come to an end, we could see even more households relocate for affordability in the coming months.”

 

Chinese developer Evergrande is on the brink of default, with something like $300 billion in debt. We have known forever that China has a real estate bubble, similar to what the US went through in the 1920s and Japan went through in the 1980s. If this is indeed the end of the Great Chinese Real Estate Bull Market then the country is probably due for a Great Depression style event. IMO, this is a byproduct of decades of rapid growth. Eventually, more and more marginal projects get built and the debt crisis creates a collapse.

As far as the banking system goes, I don’t think that the US banking system has much exposure here. We can pretty much guarantee that any bailout for Chinese banks won’t extend to foreign banks, but I suspect this might be an overseas hedge fund event. I don’t see any sort of reverberation into the US markets, however I do think that this event will be bullish for US bonds. When financial markets hit credit-related stress, the first asset everyone wants is US Treasuries. We saw good demand in the 30 year auction earlier this month, and that could portend strong demand going forward.

 

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