The Day Ahead: Markets Tepid Ahead of Multiple Data Points
A slow and steady climb from a poor opening helped US equity markets close on a positive note yesterday, with the S&P 500 gaining 0.63% to a new 11-month high. Ninety minutes before Tuesday’s opening bell, traders are hesitant to build on those gains, yet a bulk of data at 8:30 could quickly change that.
The week’s biggest release, retail sales, will be released alongside the producer price index and the month’s first regional manufacturing index, the Empire State survey. If forecasts are correct, each survey could help investor sentiment. Retail sales should see major gains owing to the cash-for-clunkers program, producer prices should rise due to climbing oil prices (which suggest stabilization in the global economy), and manufacturing in New York should see its first back-to-back positive number since January 2008.
Globally, stock markets have generally been positive today, with modest gains were seen in China’s Shanghai Index (+0.23%) and Japan’s Nikkei (+0.15%), though Hong Kong’s Hang Seng went the other direction (-0.31%). In Europe, London’s FTSE 100 is currently up 0.39% and France’s CAC-40 is trading 0.32% higher, yet Germany’s DAX is down 0.3%.
“Despite a number of encouraging data releases supporting the improving economic landscape around the world, financial markets remain hesitant about the resilience of the recovery,” noted Jennifer Lee at BMO Capital Markets.
In other news, The Wall Street Journal reports that Citigroup is working out the details of a plan to reduce the U.S. government’s 34% stake in the firm. One possibility is a multi-billion dollar stock offering, though Citi is not yet in talks with the government.
Key Releases Today:
8:30 ― Retail Sales are expected to see a 2% boost in August, mostly owing to car sales during the cash-for-clunkers program. August was the third straight monthly gain for light vehicles sales, which grew from an annual rate of 9.7 million units in June to 11.2 million in July, and then to 14.1 million in August.
“While auto sales have experienced significant stabilization, the other components of retail sales remain extremely weak as consumers continue to spend cautiously,” said analysts at BBVA.
With autos excluded, retailers are expected to post a more modest 0.4% gain, reflecting a slow recovery as consumers shift to savings mode after years of excess consumption. However, the modest gain compares favorably to the 0.6% cutback to sales in the prior month.
8:30 ― Soaring oil prices are expected to push the Producer Price Index up in August, in line with recent volatility. PPI shot up 1.8% in June, was dragged down 0.9% in July, and in August it should climb 0.8% as gas prices went up almost 30%.
“Food prices will probably reverse some of July's 1.5% contraction, lifting the headline index still higher,” said analysts at IHS Global Insight, whose forecast double the consensus at +1.6%.
Core prices, which exclude the volatile food and energy components, is expected to edge up 0.1% in the month.
8:30 ― As always, the month’s first look at manufacturing conditions will be the Empire State Survey, which surprised analysts last month when it ascended to its highest peak since the recession began in December 2007. That initiated a series of positive reports last month, culminating in a 52.9 score for the nationwide ISM report ― the highest score since June 2007. The Empire report, released by the New York Fed, posted a 12-point score in August, which is to be topped by 14-point score this month.
10:00 ― Business Inventories were probably reduced 0.9% in July after suffering a 1.1% setback in June. The more inventories are slashed, the quicker growth will be when businesses eventually begin to restock, or so the conventional wisdom believes. But for now, continued cutbacks go hand in hand with GDP declines and payroll cutbacks.
“The inventory to sales ratio is declining, which could indicate that the adjustment is nearing bottom,” said analysts at BBVA. “Although a slower rate of decline in inventories could result in a positive effect on GDP, businesses are expected to hold inventories at low levels until demand is restored.”
10:00 ― Federal Reserve chairman Ben Bernanke will repeat his speech, “Reflections on a Year in Crisis,” one day after President Obama called for more regulation from Wall Street, and one week before the next FOMC meeting. The speech itself won’t rattle markets, but traders will be looking for new comments in the expected Q&A.
Treasury Auctions:
1:00 ― 4-Week Bills