Proving that tariffs do work, China’s industrial output fell to a 5% annualized rate, which is a level not seen since 2002 and is worse than it was during the Great Financial Crisis. Even though more than 600 companies have written letters to President Trump begging him not to proceed with further tariffs, consumers should expect more since they are having the desired effect.
Despite weaker credit card flows, May Retail Sales surprised to the upside with a +0.5% MoM increase while the annualized rate of change slowed to +3.2%. Investors were hoping a weak retail sales number would encourage the Fed to ease at their upcoming meeting next week, but it is more likely the Fed will neither raise nor lower the Federal Funds rate. The positive retail sales number boosted the Atlanta Fed GDPNow second-quarter projections to +2.1%, which will all but eliminate the chance of a rate cut.
Industrial Production beat expectations for May with a +0.4% MoM increase, and factory production increased +0.2%. Keep in mind, the biggest contributor to the increase in industrial production was a spike in Utilities. If the retail sales report wasn’t enough to keep the Fed from easing, then the industrial production report will be.
Further adding to a rebound in consumer spending was the University of Michigan sentiment survey which showed a decrease in inflationary expectations with an increase in buying conditions for homes, cars, and appliances.
The increase in spending likely had to do with the stock market which set a new all-time high in early May. Spending and consumer confidence are directly tied to the performance of the stock market, so if investors want a rate cut, then they need to stop buying stocks. As I have predicted, corporate share buybacks are distorting the data and will keep the Fed on the sidelines even though financial conditions are tightening.
Stocks were down slightly in early trading as investors digest the likeliness that there will not be a rate cut from the Fed next week. The U.S. Dollar rallied, as I mentioned it would last week when it held support against its 200-day moving average, which is putting downward pressure on stocks and gold.
U.S. Treasury yields rose in early trading but their rise was quickly rejected. Ten-year Treasury yields are peering over a cliff that will lead to a massive unwind in stock prices should yields break support and fall. The probability of this happening is extremely high.
Agricultural commodities tagged their overhead resistance level and their 200-day moving average. As expected, sellers did come in but were not very strong. Look for prices to hover around this price level for the next few trading days as the Bulls asses the strength of the sellers. If selling pressure remains weak, look for prices to rise. With more rain coming to the Midwest next week, crop conditions will only get worse, but insiders say the USDA will not accurately report crop progress in hopes it gets better.
Stocks were mostly flat on the day as trading volumes vanished right up until the hour before markets closed. Treasury yields were also flat on the day after nearly breaking support, but the large commercial banks are back buying bonds in a big way.
Physical gold tried to rally after several hedge-fund managers announced that gold is their favorite asset class in the next year or two, which means they already bought and now they want others to join them. Keep in mind that hedge-fund managers are considered “Dumb Money.” Look for one final drop in gold prices as the dollar rallies.