US stocks remained heavy after a robust retail sales report sent yields higher and raised the odds that the Fed might not be done raising rates. A healthy consumer was supposed to drive soft landing calls, but too much consumer resilience will drive the Fed to keep rates higher for longer. This US retail sales report showed spending is picking up, especially given the upward revisions for June’s report.
Equities were heavy in early trade as concerns grow that China is in a lot worse shape than initially thought. Ahead of some key data, the PBOC decided to be proactive and delivered a surprise rate cut. China cut the 1-year medium term lending rate facility from 2.65% to 2.50%, which was the steepest reduction since 2020. The data that followed the rate cut was uninspiring for the rest of the year and will force officials into delivering a lot more easing. Key Chinese industrial production, retail sales, and investment data all came in softer-than-expected.
UK
Record wage growth will keep the pressure on the BOE to deliver more tightening. The economy still has a tight labor market as companies need to pay their employees more money. The rise in the unemployment rate was due to more people returning to the workforce. Average pay excluding bonuses easily exceeded the consensus estimate of 7.4%, rising 7.8% in the three months through June from a year ago.
This hot wage data is giving the BOE hawks a win as they were right in calling for a half-point rate increase last meeting. The British pound is starting to look attractive again as it seems the BOE will easily be raising rates at both the September and November meetings.
Canadian CPI
The Canadian dollar rallied after the July inflation rose back the Bank of Canada’s inflation-control target range of 1% to 3%. This was not entirely hot as both core readings remained subdued. This report means that the BOC will remain data-dependent and that the odds of one more rate hike might be growing.
Gas Prices
European natural gas futures are surging as the risk for Australian LNG workers to strike grow. If talks collapse, the world could see about 10% of global LNG exports at risk. Europe has bolstered their inventories, but a hot end to summer could lead to a surge in cooling demand. Inventories are not a concern right now, but if we get further disruptions and if weather trends in the summer and winter lead to many spikes in demand, we could see natural gas surge significantly higher.
Jackson Hole
We are a week away from Jackson Hole and Wall Street is not expecting any major surprises. Fed Chair Powell will remain upbeat regarding the progress with bringing inflation down. July PCE data to be sticky and keep risk of one more hike on the table. Given the US economic resilience backdrop, the Fed will want to keep optionality here, so an end of tightening will not be signaled.
Oil
Crude prices continue to pullback after both disappointing Chinese industrial production data and the German ZEW survey that showed concerns with recovery are elevated. The oil market might remain tight, but most of the headlines are turning bearish for the demand side. Oil’s pullback might need to continue a while longer before buyers emerge.
Gold
Gold prices are falling as real yields continue to rise. Gold could be stuck in the house of pain a little while longer if the bond market selloff does not ease. The 30-year Treasury yield rising above 2% is a big red flag for some traders. We haven’t seen yields on the 30-year at these levels since 2011, which is making non-interest bearing gold less attractive even as China’s property market rattle markets.
Home Depot
Home Depot delivered mostly in-line results, but they were able to hold onto their guidance. Big ticket projects are under pressure, but small projects remain in demand. Share prices rose given the lowered May outlook was reaffirmed and after they set a $15 billion buyback.
