Markets Wander Through Week Like a Hippie at Woodstock

Markets continued to search for direction this week, glued to every twist and turn in the on-going U.S.-China trade war. Stocks appeared set to get a lift early in the week as the Trump administration announced it would push back China tariffs on cellphones and clothing slated to begin on Sept. 1 to Dec. 15. The move is designed to help shoppers during the upcoming holiday shopping season. Unfortunately, optimism seemed to fade by mid-week as investors remained concerned the lingering trade uncertainty would push the U.S. economy into recession. That lead investors to seek the safety of bonds, sending yields lower and causing the yield curve to temporarily invert. The phenomenon occurs when the yield on a 2-year U.S. treasury rises above the yield on a 10-year U.S. treasury, and has often, but not always, signaled a recession is on the horizon over the next 22 months. Although stock investors were spooked by the move, U.S. economic data continues to remain healthy with consumers posting another strong month of retail sales gains despite a rise in prices. By week’s end, investors seemed to have renewed confidence that consumers, which make up two-thirds of U.S. GDP, would help carry the economy. Strong gains during Friday’s trading session helped limit the weekly decline in the S&P 500 to -1.03%.

Shoppers Shrug Off Trade War

Consumers continued to buck the pessimism on Wall Street, sending retail sales up 0.70% in July. That’s up from the 0.30% gain in June. Excluding autos and gas stations, sales were up an even more robust 0.90% for the month. The increase in sales was led by internet retailers who registered a 2.80% rise in sales. Results were driven by Amazon’s Prime Day deals as well as rival retailers who held competing sales of their own. Restaurant and bar receipts also posted impressive results, notching a 1.10% increase for the month. Coming in a close third, were electronics and appliance store sales which registered gains of 0.90%. Overall, the results were encouraging, signaling consumers remain confident opening up their wallets despite U.S.-China trade tensions.

Consumer Prices Heat Up

U.S. inflation increased in July, up 0.30%. July’s rise matches June’s increase. Excluding the volatile food and energy sectors, core consumer prices rose 0.30%. The increase in prices was led by a 0.90% increase in used car and truck prices. Meanwhile, the cost of medical care services remained a thorn in consumers’ side, up 0.50% for the month. Apparel prices also ticked up in July, up 0.40%. The rise didn’t seem to deter shoppers as sales of clothing and clothing accessories stores posted gains of 0.80%. Despite the back-to-back monthly increases in top line inflation, consumer prices were up a modest 1.80% year-over-year while core consumer prices were up 2.20%. Those figures remain relatively in line with the Fed’s 2.00% target level of inflation and shouldn’t keep the Fed from cutting rates if need be in the coming months.

Stocks continued to march to the beat of on-going developments in the U.S.-China trade war, which this week on the whole appeared to be positive. The White House moved to delay some tariffs on Chinese goods, giving the two sides time to kickstart talks in the next two weeks. Meanwhile, China signaled it was open to making comprises to secure a trade deal. Despite trade dominating headlines on Wall Street, Main Street seemed undeterred as consumers posted another strong month of retail sales gains. On the back of this week’s strong retail sales report, the Atlanta Fed was prompted to revise its GDPNow forecast for Q3 2019 to 2.20%, up from a previous forecast of 1.80%. If the trend holds that would be in line with Q2 2019’s GDP of 2.10%, a sign of the U.S. economy maintaining its momentum.

The Week Ahead