A constant theme is to expect the unexpected. April’s retail sales disappointed. Consensuses had expected a 0.2% increase but sales were flat. Sales are now flat or down four out of five months with March being the lone exception.
Many including me thought the fall in crude would increase sales ex gas. The consumer however has been saving the windfall as the savings rate is now at the highest level since the end of 2012 according to government statistics.
One would expect the Treasury to rally on this news as it would suggest yet another revision in the monetary timetable. Treasuries however sold off. Is this because crude is up almost 50% in two months, a rise that may impact inflationary pressures.
I rhetorically ask is the rise in crude really that unexpected if examined on a historical perspective? Many times I have reference the five oil shocks since 1990 that produced an average decline of 48%. Each drop had its unique characteristics that many declared that this decline was different and long lasting. Six months after a bottom was reached, crude retraced an average of 52% of the decline. Twelve months later about 90%.
Is history repeating itself? All must remember past performance is not indicative of future performance; however don’t all need guideposts to make decisions so such choices are not made in a vacuum?
Today the PPI is released. Last month producer prices surprised on the upside, partially the result of oil. Will today be a repeat? If so will Treasuries continue their selloff?
Several times I have opined the deflationary trade is unwinding, an unwinding that commenced in Europe. I think yesterday’s announcement that there was growth in all four of the largest Euro zone countries (Italy, Germany, France and Pain) for the first time since 2010 was significant. Moreover this growth was stronger than the US growth rate and accelerated from Q414.
Wow! This too is unexpected thus suggesting the full implementation of Europe’s QE program may not be necessary.
Commenting about the equity market, markets were quiet as the retail sales data is raising questions as to if the economy is accelerating from winter’s doldrums.
Last night the foreign markets were mixed. London was down 0.03%, Paris up 0.35% and Frankfurt up 0.33%. Japan was down 0.98% and Hang Sang up 0.14%.
The Dow should open moderately higher as the dollar is now heading for its fifth weekly decline, the longest losing streak since October 2013 and is now at the lowest level in four months. Wow! Many including me thought currency turns were long in duration. Treasuries are still struggling ahead of today’s auction of the 30-year. The 10-year is unchanged at 2.27% yield.
