OnTheRadar: Strong July Retail Sales Data Inspires

--One Data Set Not Enough To Pile Into Risk-On Trades

By Vicki Schmelzer

     NEW YORK (MNI)   - Strong July retail sales inspired market players to look

ahead more optimistically at the U.S. economy, but were not enough to prompt

them to pile into risk-on trades Tuesday. 

     July retail sales rose by 0.6%, with ex-motor vehicles up 0.5%, well above

MNI's median estimates of +0.3% for both. In addition, headline June retail

sales were revised to +0.3% from -0.2%, with ex-autos revised to +0.1% from

-0.2%. See MNI Main Wire story at 8:30 a.m. ET for details.

     "Given the seesaw pattern of this dataset, don't be shocked if the August

report is on the soft side, perhaps shaving a little off of the July increases

and falling short of trend for August," said Stephen Stanley, chief economist at

Amherst Pierpont Securities. 

     Nevertheless, the data still shows that "the consumer, as always, is alive

and well," he said.

     "As long as labor market strength is kicking off almost 200K new jobs per

month and wages are picking up, labor income should drive solid gains in real

spending. I expect to see on average 2.5% to 3% growth in real consumer spending

going forward," Stanley said.

     U.S. Treasury yields and the dollar edged higher in response to the solid

retail sales data, but were reluctant to vault initial hurdles. 

     Ten-year U.S. Treasury yields were last near 2.266%, after trading in a

2.225% to 2.282% range. 

     Last week, U.S. yields peaked near 2.289% August 8, also the August 4 high

seen in the wake of the release of an upbeat U.S. jobs report, and then edged

lower  as risk appetite declined. 

     Friday's 10-year yield low of 2.184% was the lowest since June 27, when

ten-year yields bottomed near 2.126%. 

     Ten-year U.S. yields looked set to close back above the 55-day moving

average, currently at 2.243% but below last week's high yields. The market will

be reluctant to become bearish towards U.S. Treasuries until the 200-day moving

average, at 2.325%, is vaulted decisively.  

     U.S. Treasury yields bottomed June 14 near 2.103%, which was the lowest

since Nov. 10, when 10-year yields saw a wide range of 1.991% to 2.145% two-days

after the U.S. election. Nov. 10 was the last time 10-year yields traded below

2.0%.

     U.S. yields subsequently recovered, with the June lows deemed overdone,

with 10-year yields rising to 2.396% July 7, the highest since mid-May. More

recently, U.S. yields topped out at 2.357% July 14 and have been on the

defensive subsequently. 

     As background, U.S. Treasury yields posted highs near 2.421% on May 11,

which was the highest yield since March 31, when the 10-year yield peaked at

2.431%. These levels will be the next larger topside hurdles.

     On March 14, ahead of the Fed decision, 10-year U.S. yields topped out at

2.628%.

     As a reminder, 10-year U.S. yields rallied from lows near 1.720% Nov. 9,

the day after the U.S. election, to highs near 2.639% on Dec. 15, 2016, which

was the highest since the Sept. 19, 2014, peak near 2.655%.

     Ten-year German Bund yields closed near 0.433% Tuesday, after trading in a

0.416% to 0.459% range. The August 11 low of 0.376% was the lowest Bund yield

since June 28, when yields troughed at 0.332%.  

     The July 12 yield high of 0.619% was the highest since Jan. 4, 2016, when

Bund yields peaked at 0.627%, the 2016 high. The next level of resistance will

be 0.651%, the Dec. 30, 2015 high. 

     The June 14 low of 0.225% was the lowest since April 20, when yields

bottomed at 0.192%.

     As background, Bund yields fell to a low near -0.161% Sept. 27, 2016,

versus the life-time low around -0.2059% seen July 6, 2016.

     Bund yields backed off after the ECB left policy unchanged July 20, but up

until recent risk aversion, maintained a toehold above 0.50% on expectations of

new insight into the central bank's bond buying program, set to expire at the

end of December, either at the Jackson Hole symposium August 24-26 or at the

next monetary policy meeting Sept. 7. 

     Ten-year UK Gilt yields closed around 1.084%, after trading in a 1.081% to

1.115% range. 

     The July 7 high Gilt yield of 1.338% was the highest since Feb. 6, when

yields peaked at 1.370%.

     The June 14 low of 0.923% was the lowest since Oct. 7, when Gilt yields

bottomed near 0.905%.

     On Jan. 26, 2017, 10-year UK yields saw highs near 1.530%, which was the

highest yield since Dec. 15, when yields hit 1.536%, the highest since May 5,

2016, when Gilt yields saw a high near 1.538%.

     Ten-year Japanese government bond yields closed around 0.050%. Yields hit

highs near 0.108% on July 7, which prompted the Bank of Japan to step in buying

bonds, offering to buy 10-year JGBs in unlimited amounts at 0.11%. 

     Current high yields compare to April 20, when JGB yields flirted with

negative territory for the first time since last November and the Feb. 3 highs

near 0.150%, which were the highest since the BOJ introduced negative interest

rate policy back on Jan. 29, 2016.

     In currencies, the euro held near $1.1739 late Tuesday, in the middle of a

$1.1687 to $1.1793 range. 

     The earlier euro low was the lowest level since July 28, when the pair

bottomed near $1.1671. 

     The August 2 euro high near $1.1910 was a 30-month high and the highest

since Jan. 6, 2015, when the pair peaked near $1.1969. The euro last traded

above the psychological $1.2000 mark Jan. 5, 2015.

     The 2015 euro high was $1.2109, seen Jan. 1. And two weeks earlier, on Dec.

16, 2014, the euro peaked at $1.2570. 

     Dollar-yen, tracking U.S. yields closely, was closing near Y110.53, after

trading in a Y109.61 to Y110.85 range. 

     The August 11 low near Y108.74 was the lowest since April 20, when the pair

troughed at Y108.72. 

     As background, dollar-yen bottomed at Y108.83 June 14, the day U.S. 10-year

yields posted their most recent low of 2.103%, and then tracked U.S yields

higher, topping out near Y114.49 July 11, the highest level since mid March,

around the same time 10-year yields hit 2.396%. 

     In commodities, spot gold was closing near $1,273.05 per ounce, after

trading in a $1,267.39 to $1,284.47 range. 

     At the peak of dollar selling and safe-haven demand, the precious metal

topped out near $1,292.10 Friday, nearly revisiting 2017 highs. 

     On June 6, gold posted a high of $1,296.15, but then stalled, creating a

double-top with the $1,295.56 high seen April 17. Subsequently, gold moved lower

as U.S. Treasury yields and the dollar recovered, bottoming July 10 near

$1,204.90. 

     If the psychological $1,300 mark gives way, the not topside target will be

$1,337.38, the high seen Nov. 9, in the wake of the U.S. election. 

     NYMEX September light sweet crude oil futures settled down $0.04 at $47.55

per barrel, after trading in a $47.02 to $47.77 range. The 55-day and 200-day

moving averages, at $46.61 and $49.34 respectively, will act as initial support

and resistance. 

     The front contract peaked August 10 at $50.22. This came after topping out

at $50.43 August 1 and $50.41 July 31, which was also the last time West Texas

Intermediate closed above the $50 mark. 

     Risk aversion and a lack of topside follow-through, more so than a change

in oil fundamentals, has weighed on prices recently.

     Most recently, WTI topped out at $52.00 May 25, before the announcement of

a nine-month extension of OPEC/non-OPEC production cuts. The extension was

largely priced in and oil fell to $42.05 on June 21. 

     Trading continued to be driven by supply rather than demand, with concern

about OPEC/non-OPEC non-compliance as well as increased U.S. production. 

     The S&P 500 closed down 0.05% at 2,464.61, in the middle of a 2,461.61 to

2,468.90 range. 

     At the close, the index was up 10.1% year-to date and down 1.1% from the

life-time intraday high of 2,490.87, seen August 8. The S&P 500 bottomed at

2,437.75 August 10, the lowest level since mid July. 

     The Dow Jones Industrial Average posted a record intraday high of 22,179.11

on August 8 and the the Nasdaq Composite posted a life-time high of 6,460.841

July 27. The indexes closed Tuesday up 0.02% at 21,998.99 and down 0.11% at

6,333.01 respectively. 

     In terms of risk appetite, the CBOE's volatility index or VIX was last

11.90, in the middle of a 11.45 to 12.37 range. 

     Last week, at the peak of escalating U.S.-North Korea tensions, the VIX

vaulted twin peaks of 16.30, from May 18, and 16.28, from April 17, with the

latter run-up driven also by North Korea concerns. 

     Friday's VIX high of 17.28 was the highest since Nov. 9, the day after the

US election, when the VIX peaked at 21.48. The 2017 high was 23.01, seen Nov. 4

ahead of the election. 

     This week, the VIX has moved back below the 200-day moving average,

currently 11.97, which has been taken as a sign that risk appetite is improving.

     The July 26 low of 8.84 was a new life-time intraday VIX low (prior

life-time intraday low was 8.89, seen Dec. 27, 1993). 

     As a reminder, sub-20 VIX levels are deemed risk friendly, 20 to sub 40

risk neutral, and 40 and over risk averse.

     Looking ahead, Wednesday's release of the FOMC July 25-26 meeting minutes

will be the focus along with the weekly EIA crude inventory data. 

     --follow MNIEyeonFX on twitter.com --

--MNI New York Bureau; tel: +1 212-669-6438; email: vicki.schmelzer@marketnews.com

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