In Europe, the response to the energy crisis is still a hodgepodge of national initiatives

Outlook: We get the usual Thursday jobless claims today, plus retail sales and industrial production. In addition, the slate includes July business inventories, import/export prices, and the September Empire State and Philadelphia Fed surveys. We the Atlanta Fed updates its GDP Now estimate. It was 1.3% last week, down from 1.6%.

Retail sales are considered a proxy for consumer sentiment but it’s a bit tricky now because of low gasoline prices. In July, retail sales were all over the place due to Prime Day and depending on what was included or excluded. The overall reading was zero change month-to-month. Trading Economics reports “Excluding automobiles, gasoline, building materials and food services, the so-called core retail sales rose 0.8% (vs 0.7%).” You have to ask whether those exclusions are reasonable. This month, the forecast is for overall retail sales up 0.5%.

We also get industrial production, which came at 3.9% y/y in July following -4% in June. Of that, manufacturing rose 3.2%. This time, overall production for August may be dragged down by manufacturing as suggested by declines in the PMI’s. Trading Economics has 3.2%.

In Europe, the response to the energy crisis is still a hodgepodge of national initiatives. The EC can’t get agreement on various matters, including a cap on natgas prices. The Ec will start talks with Norway and oh yes, it’s thinking of soft rationing in the form of a 5% cut in peak-hour consumption. How is that going to be enforced? In Italy, PM Draghi proposes a €13.5 billion assistance package consisting of tax breaks, installment plans, and a few other tricks. It’s not clear Italy is going any slower than anyone else, considering the election that looms.

Then there is the mysterious case of the yen that didn’t bark in the night. Traders, and not just Japanese traders, seem paralyzed after the BoJ reportedly “checked prices” the day before. Today’s trade data is downright weird but the dollar/yen barely moved. Aug exports rose less than forecast (22.1% y/y vs. 24.1% expected), if better than 19.0% in July–but import s were a whopping gain of 49.9% y/y (vs. 46.9% expected and 47.2% in July). This is due almost entirely to energy costs. The deficit worsened to ¥2.37 trillion from ¥2.155 in July and ¥2.085 trillion expected.

Why on earth the BoJ is being pig-headed about the rate cap is a mystery. If we assume it remains stubborn, the threat of intervention lacks legs and the dollar/yen “should” resume the march to 150. Or 165, and why not?

Overall, traders in multiple markets want to avoid a crunch or a crisis, and just sit in a corner today quietly reading a spy novel. This bodes ill for the dollar resuming its upmove, especially since the bounceback in too shallow and may be incomplete.

Tidbit: The railroad strike was averted by a last-minute deal. It was due to start Friday and lack of agreement might have necessitated Pres Biden whipping out a federal subsidy or an executive order from his magic hat. He’s the union guy, remember. How embarrassing to get the first strike since Bush One on his watch. And talk about supply chain issues! Cost estimates vary but depending on how long a strike would last, the numbers are six or even seven figures, or 30-40% of all freight in the US. And commuters and other non-freight would be affected, too, because those tracks are owned, maintained and traffic-managed by the freight railroads.

Because the situation was so critical to the economy, it was a good bet a deal was going to happen. But stop for a minute and wonder at how fragile the US economy can be and wonder what else is out there we might be missing.

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