Stocks pop on strong Retail Sales report but ease on declining sentiment

US stocks extended gains after a robust retail sales report suggested a strong US consumer has so far been able to handle the recent pricing pressures. Traders will be having the inflation debate over the next couple of quarters, but what many can agree upon now is that we are seeing a long-term secular declining trend in rates as the US will have a high debt burden problem going forward and can’t afford to raise rates. The longer-end of the Treasury curve will struggle to see the steepener trade return.

Throughout the pandemic, traders got used to seeing the banks crush the start of every earning season. This week, the banks provided mostly strong results, but the bar was set too high, and the bond market has a different outlook for treasury yields at the longer end of the curve. COVID-19 concerns still linger and the economic outlook is not as bright as it was just a few weeks ago. One thing that was very clear this week, is that pricing pressures are not easing.

The upbeat mood on Wall Street somewhat eased after University of Michigan Sentiment dropped significantly, while inflation sharply rose across the board. The preliminary July headline sentiment reading fell from 85.5 to 80.8, a big contrast from the expected increase of 86.5.

The Dow Jones Industrial Average is testing the psychological $35,000 level after the retail sales report shows higher prices are not derailing the US consumer and as infrastructure spending is knocking on the door.

US data

The economy is looking hot again after retail sales bounced back sharply in June. The US consumer is so far unfazed by higher food, energy, cars, and restaurant prices. US retail sales increased by 0.6% in June, better than the expected decline of 0.3% and downwardly revised prior reading of -1.7%. The monthly reading ex autos also impressed at 1.3% a strong improvement from the revised prior reading of -0.9%. This data sets up a very strong second quarter GDP reading, but financial markets will doubt that trend can continue as inflationary pressures intensify.

Oil

Crude prices are slightly higher after a brutal week saw COVID-19 concerns across Asia and Europe dampen the short-term crude demand outlook, while OPEC+ seems poised to deliver more output. A big driver for oil prices will be Iranian output and that question won't get answered until well after Iranian hardliner Raisi will be inaugurated president in early August.

Last month, everything on the supply and demand side was bullish for crude prices. This month, reopening momentum all around the world took a major step backwards. What is most concerning to the outlook is that even highly vaccinated countries are struggling with the Delta variant. The UK is going ahead with Freedom Day despite a rise in cases, while the US has seen a doubling of cases in the last two weeks. While the US and UK won't have major reversals with the easing of curbs, it shows how much harder the fight will be for the rest of the world. Singapore is imposing more curbs; Thailand posted a record number of cases. Africa suffered its worst pandemic week ever as they struggle to get their hands on vaccines.

WTI crude has tentatively found support around the $72.00 level but that might not last given how high oil prices have run since the end of March. WTI crude could see an early test of the $70.00 level next week if the energy market does not see any major shifts with the demand outlook and as long as OPEC+ ratifies the agreement made between Saudi Arabia and the UAE.

Gold

Gold prices are giving back some of this week’s gains as Treasury yields rise following a robust retail sales report. Gold’s rally fizzled after testing critical resistance levels around the $1,835 area. Fed Chair Powell’s testimony to Congress was not enough of a reason for gold to break higher despite his dovish assurances.

With the Fed’s blackout period starting tomorrow, gold is likely to remain in choppy trade until we get beyond the July 28th FOMC decision.

Bitcoin

Bitcoin pared earlier losses after reports that Bank of America approved trading of Bitcoin futures for some clients. This is a big commitment for America’s second-largest bank and signals that interest in trading cryptocurrencies is here to stay. On Wall Street, if one bank sees opportunity in doing something risky, the rest will easily justify following suit.

Bitcoin is still stuck near the lower boundaries of its tight trading range, but this is still positively viewed as a healthy consolidation.