Daily Insight

U.S. benchmark indices declined for a second day – led by what else? financial and consumer discretionary shares. These have been the stocks that either push the major bourses higher during rallies or pressure the benchmarks on days of decline as questions over the housing market and consumer are the lead worries. (For the market in total, certainly inflation, tax rate, dollar/oil and geopolitical event uncertainties all currently weigh on investor sentiment. But regarding GDP components, it is housing and the consumer and so long as this is the case financials and consumer discretionary will determine the market’s direction.

The broad market did improve as the day wore on (as the chart below illustrates) thanks to core retail sales growth and business inventories and sales data that indicate the economy is not as weak as many portray. A higher revision to GDP has been our theme for a couple of days now as that’s what the data of the past few days is telling us. The mid and small-cap stock indices bucked the trend to advance yesterday.


Market Activity for August 13, 2008

The best performers of the day were energy, basic material, utility and information technology shares. Energy stocks received a boost, after four-straight sessions of decline, as oil rose 2.65% to $116 per barrel. The weekly energy report showed a larger-than-expected decline in supplies – which was probably a result of Tropical Storm Edouard as it caused rigs to suspend production and halted imports for a couple of days.

On the economic front, overall July retail sales fell for the first time in five months due to weak auto sales – the figure declined 0.1%. Excluding autos, sales rose 0.4% last month and have jumped 10.3% at an annual rate the past three months.

Core retail sales, which exclude autos, gas station receipts and building materials, rose 0.3% in July and are up 10.2% annualized the past three months.

The relevance of this core reading is two-fold:

One looking at this figure minus gas station receipts during a time of high prices helps to reduce the impact of a boost in this figure due to those high prices. Further, subtracting building materials has helped to smooth the data and remove the volatility of a housing market that was boosting the reading to robust levels during the peak of the housing boom that ran 2005-2006 and subtracts from the figure due to the housing correction currently.

Second, this core retail figure is used to calculate the consumer spending portion of GDP – since this reading has advanced at a pace that outpaced inflation during the quarter (thus real consumer consumption was higher) it provides yet another indication Q2 GDP will be revised higher.

In a separate report, the Labor Department reported that import prices jumped 1.7% in July and has accelerated to 21.6% year-over-year. Even excluding oil the figure remains high, up 0.9% in July and 8% from this time last year. The dollar/oil trend of the past few weeks will help to improve this, but we’ll need to see oil and the greenback continue to trend in the desired direction or at least hold here.


Lastly, the Commerce Department released its June business sales and inventory reading. This figure also illustrates GDP will be revised higher. Putting the trade (as discussed yesterday), business inventories and core retail sales data together – all figures that were stronger than initially estimated when the first look at GDP was released – we’re looking at a real rate of growth of at least 2.5% and may be close to 2.8%. That’s not bad considering housing’s drag on the economy. (For context, our long-term average is real annual growth of 3.4%, or roughly 6.5% in nominal terms.)

Anyway, business inventories rose 0.7% in June, beating the expectation of a 0.5% increase. Sales growth was powerful again, jumping 1.7% in June -- up 17% annualized past three months and up 9.2% year-over-year.

I’ll caution, since we’ve had four straight months of robust sales data (up 1.2% in March, 1.5% in April, 1.1% in May and now this big 1.7% increase), July will probably show a natural decline. The economy is weaker-than-normal and this pace will not be sustained. Nothing wrong with that, I’m just preparing everyone for the media hysteria that arises when the number posts a decline as these people are unwilling to put things into perspective.



This morning we get the CPI figure for July and initial jobless claims. Both will be closely watched, but the market will probably focus a bit more on the jobless claims number since it has moved higher over the past two weeks and is showing an ugly trend. The CPI reading looks ugly too but the recent decline in energy prices has eased the inflation worry a bit – for most at least.

Have a great day!


Brent Vondera, Senior Analyst