Friday, August 16, 2019

Economic growth does still exist in the US; are the bond market’s recession fears premature?

  • Dollar
  • Gold
  • Euro
  • Dow Jones

Market recap: DJIA rebounds 99 points after its worst day in 2019

Wall Street rose on Thursday after suffering massive losses on Wednesday, as economic figures released by the US gave a much more positive outlook regarding the country’s economy. July’s US retail sales reportedly grew 0.7%, a massive jump from its 0.3% gain in June, and beating the market’s prediction of 0.4% in the process. The American public spent more at stores and restaurants in July, with online retailers and grocery stores also recording strong growth. Some experts attribute this sales surge in part to Amazon’s Prime Day, but overall the figures prove that consumers are not put off from spending money by the prospect of an economic slowdown.

Consumer spending contributed to more than 70% of the US’s economy, and has enhanced the market’s confidence when it comes to GDP growth in the third quarter of 2019. The result? Most analysts have raised their forecasts to a growth rate of 2.1% after reading yesterday’s retail sales figures. What’s more, fears from the bond market regarding a recession (after the yield of two-year and ten-year treasury bonds inverted earlier this week) are now being viewed as premature and exaggerated - the spread was no longer inverted on Thursday.

The DJIA rose 99 points on Thursday, in part thanks to those retail sales figures, but also thanks to Walmart’s new quarterly earnings report. The shopping brand soared 6.1%, a number that raised the company’s outlook for the whole year and proves that one of the biggest retailers in the US still has confidence in the US economy. Alibaba surged 2.9% after its earnings report also showed the retailer performed better than expected. The company has experienced growth thanks to its successful cloud division, plus core commerce businesses including online brands Taobao and Tmall.

The US vs China trade war is still making headlines, and US President Donald Trump again delivered a much softer tone on Thursday after a strong speech on Monday. “I think we’re having very good discussions with China,” he said. “They very much want to make a deal.” He seemed optimistic about a trade deal, adding, “I have a feeling it’s going to go fairly short”. Trade negotiators from both superpowers are set to meet this September in Washington, though a specific date has not been announced. Meanwhile, it has been reported Japan surpassed China in June as the top holder of US Treasuries, as the trade war between Washington and Beijing intensifies. The last time Japan was in first place was in May 2017.

Today’s analysis: Will US retail sales figures go up or down in August?

July’s US retail sales figures surprised the market, especially considering the inverted yield curve earlier this week, but will we see a repeat from August’s numbers? July saw Amazon Prime Day sales, and the stock market stood at a record high, while most investors had extra money in their pockets to spend and even schools were out for summer. They were all contributing factors to yesterday’s good figures, but the outlook for August isn’t so good. The stock market has slumped at times this month and the trade war has intensified, and these are issues that could affect consumers’ spending behaviour and how they perceive the economy. We don’t’ believe retail sales in August can remain as strong and we have reservations that the US’s Q3 GDP can still stand at 2.1%.

More US figures released today a GMT+4 18:00 should give a clearer picture. The University of Michigan Consumer Sentiment Index was expected to perform at 97, lower than the prior 98.4. If that’s the case, the dollar may drop from its day high of 98.25’s level. But as we have mentioned before, the dollar index is tipped to stay strong, especially given that the economic outlook and technical performance of euro and sterling still look worse than what we’ve seen from the US.