Market commentary: Stronger US retail sales set the scene for rate hike

Yesterday we learned that headline retail sales advanced +1.2 percent mom for the month of May and in line with market expectations while there was a cumulative +0.6 percent of revisions to the prior two months.

The important retail control element however (which is a key input into goods spending for GDP) was up +0.7 percent mom and ahead of expectations of +0.5 percent, as well as upward revisions for April and March of +0.1 percent and +0.4 percent respectively.

These stronger figures help make a stronger case for a September rate hike given a continued rebound in the data.

The import price index for May (+1.3 percent mom vs. +0.8 percent expected) was a notable beat, while business inventories for April (+0.4 percent mom vs. +0.2 percent expected) also surprised to the upside. Initial jobless claims meanwhile rose 2k to 279k (in-line with the four week average), but stayed below 300k for the 14th consecutive week.

Prior to the release of the economic figures, the European markets were extremely mixed to say the least! The session started off very strongly for equities as news that the troika of lenders were very close to reaching an agreement with Greece. The DAX was up around 1.8 percent at this point as enthusiasm swept the trading floors while sovereign bond yields soared.

A couple of hours later though things changed very rapidly as news that officials from the IMF walked out of the negotiations and returned back to their headquarters sent the equity markets tumbling and yields tumbling again.

The session closed out yesterday in positive territory for equity markets in general and also for sovereign bond markets, with the DAX closing up 0.6 percent, the CAC 40 up 0.74 percent and the 10 year German bund closed 9.5 bps down after a 5 bps rally earlier to a high of 1.03%.

Similarly in the U.S., 10y Treasury yields actually rallied on the day and eventually closed 10.7 bps tighter at 2.378%. Prior to the data, yields hovered dangerously close to 2.5% intraday, reaching a high of 2.499%. Although Greek equities actually closed up +8.16% yesterday, although it’s worth noting that the market closed before the IMF headlines came out.

Yesterday a spokesman for the IMF in Brussels said that ‘there are major differences between us in more key areas’ and that ‘there has been no progress in narrowing these differences recently’. This morning Greece remains a hot topic as reports that Greek officials are revising an offer and will continue negotiations, however clearly the relationship seems to be on a knife’s edge.

Looking at the day ahead in terms of data releases, Euro Area industrial production will likely attract the bulk of the attention in Europe, while UK construction output is also due. Over in the US this afternoon, PPI data for May will be the key as well as the preliminary June University of Michigan Consumer Sentiment reading.

This article was issued by Simon Psaila, Trader/ Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.