US Retail Sales Soar in July (But Not in June)

Good day, and a wonderful Wednesday to you! How are you this morning? Or whenever it is that you get to read the Pfennig? I’m doing OK, hanging in there, more or less… sort of like my beloved Cardinals, and the markets. The summer has been tough on a lot of things and people, but we must carry on, my wayward son!

The attempt by the currencies to make another run at the dollar yesterday fizzled out by noon. There’s just not enough oomph to move keep these rallies going. Another thing that occurred to me yesterday as I watched the currency rally fizzle out is that recently, we’ve seen the overnight markets sell dollars and the U.S. markets buy dollars. Sort of like a tug of war going on. Most people would immediately say, “Well, the U.S. will win that tug of war because they are so big.” And that was probably true, until China awoke from its slumber. So the jury is out on who wins this tug of war. But it’s the U.S. traders’ turn to pull, as the overnight markets have had their turn.

U.S. retail sales yesterday were all that they were trumped up to be, rising 0.8% in July. You may recall that I said that the BHI had indicated to me that the figure would be +0.5%. The so-called “experts” thought the number would be +0.3%, so the actual (if you believe that it’s really “actual”) figure of 0.8% blew past both the “experts” and the BHI indication. But before you go out and jump up to click your heels, you might want to check out the June revision. Originally, June retail sales were reported to have fallen 0.5%. Well, the revision put them down to -0.7%. So taking the two months, we have basically flat retail sales. Which leads me to believe two things.

The first being that the July sales report probably included a ton of back-to-school sales, which is fine, but don’t count on them every month. And the second being that I do believe that when all the beans are counted, that July’s number will be revised downward next month.

At first, the markets reacted like they used to after the financial meltdown, with selling dollars when the economic data are good. But that didn’t last long, and soon, traders had switched back to buying dollars.

Another thing to look at is the 10-year Treasury yield. Down in the currency roundup, I’ll tell you that the yield this morning is 1.77%. But here, I’m going to tell you that the yield has “gapped up” again. Just two weeks ago, the yield on this 10-year Treasury was 1.48%. And I’ll remind you that as the yield on bonds rises, the price of the bonds goes down. Those 29 basis points are worth 2.666 in price points lost. Last week, I included a blip from the godfather of news analyst/writers and a longtime fave of mine, Richard Russell, who wondered if the gap up to 1.66% was the beginning of the Treasury bubble finding the pin in the room.

We have to be careful here, because we’ve seen these moves a couple times in the past five years, and each time they proved to be false dawns. And with the Fed entrenched in the fight to keep rates low, we could be fighting an enemy with a printing press. And once again, the printing press will prove mightier than the sword! HA! But this two-week move higher in Treasury yields could also be one of the reasons the dollar is getting some love by the U.S. traders. I’ll tell you this, and I’m sure I’ve said it before, but, anyone playing with Treasuries is playing with fire. and you know what your mother told you about what happens when you play with fire.

Not that I want to dedicate the whole Pfennig to Treasury talk, but this plays well with the price action in gold, but I think that the retail sales data yesterday, never mind the June downward revision, has blinded traders by the light. Yes, these traders, market gurus, etc., are thinking that the safe havens of Treasuries and gold won’t be needed. I don’t believe that, but they do, and that’s what’s moving these two assets lower in price.

U.S. July PPI printed yesterday. And wholesale inflation showed a step up from 0.2% in June to 0.4% in July, but year on year fell 0.2%. Today, we’ll see the stupid CPI (consumer inflation). The government tells us there little to no inflation. Tell them that they haven’t been grocery shopping lately, or clothes shopping, or to the movies, ballpark, opera, a music concert, etc. And once again, I’m going to tell you how the companies are playing ball with the government. The companies or manufacturers or whatever is making whatever it is you buy smaller, but charging the same price. The price doesn’t increase, but you have to go back to the store and buy whatever it is more often.

We’ll also see two of my fave economic data prints. Capacity utilization and industrial production and what used to be a currency driver, but is no longer even scrutinized: the TIC flows or net foreign purchases of Treasuries. Before the Fed became the chief buyer of Treasuries, these data used to mean something. You see, when the data would show that foreigners were backing away from Treasuries used to be a scary thing to the markets, but now when that happens, the Fed simply takes up the slack, and voila! No problem! Yet, that is…

The Australian dollar (AUD) has had a tough row to hoe this week. There have been many calls to sell A$s, as many observers believe they have reached their peak. Hmmm… I think it probably has more to do with the fact that the positive rate differential that the A$ enjoys has has been shrinking with the gapping up in Treasury yields, and the reduction of bets that the Fed will implement QE3. Recall that a few weeks ago, bets had reached a fever pitch that the Fed would implement QE3. But since then, the bets are being reduced, and that plays well with the losses in Treasuries and gold too.

So the A$ has slipped through the $1.05 handle and looks vulnerable to more weakness. But don’t forget that the A$ has seen these moves lower in the recent past, only to come bouncing back with a bang. So be careful to not get caught up in the undertow.

The euro (EUR) was going along nicely this morning when I arrived, at 1.2330, but has lost half a cent while I was writing. There hasn’t been much coming out of the eurozone lately. Yes, we’ve seen some jostling and finger-pointing at Spain, but nothing like we had in July. We are coming up on the deadline for the Greeks to show that they have the austerity spirit and prove to the eurozone leaders that they are serious about cutting debt. If not, if they fail to impress, the Greeks won’t get the next tranche of bailout funds. A German official laid down the gauntlet when he said, “You can quote me: Even if the glass is half full, that is not enough for a new aid.”

Another thing weighing on the markets is that China hasn’t reacted to the weak data last week as I and the markets thought it would. I thought for sure a reserve ratio reduction would be the first announcement, followed by an actual rate cut. But we haven’t heard a word from the Chinese leaders. Not one word. This is unusual, because we normally see everybody talking. Everybody talks, everybody talks. It started with a whisper.

It’s like the Chinese leaders have gone into hibernation. And last night, they pushed the renminbi/yuan weaker again. Hmmm… Something’s about to happen here.

Then There Was This, from Businessweek.com this morning:

“Paulson, Soros Add Gold as Price Declines Most Since 2008

“Billionaire investors George Soros and John Paulson increased their stakes in the biggest exchange-traded fund backed by gold as prices posted the largest quarterly drop since 2008.

“Soros Fund Management more than doubled its investment in the SPDR Gold Trust to 884,400 shares as of June 30 compared with three months earlier, a U.S. Securities and Exchange Commission filing for second-quarter holdings showed yesterday. Paulson & Co. increased its holdings by 26%, to 21.8 million shares.”

Not that I admire those two guys. In fact, one of them is on my Top 10 disliked list. I’ll let you guess which one But these guys didn’t get uber-rich by sitting around and watching stuff unfold. So that’s why I included the story this morning. These guys are buying on the dips. Shouldn’t we be doing that too?

To recap: The currencies’ attempt to make another run at the dollar fizzled out yesterday, and it appears that the “safe havens” of Treasuries, gold and Australian dollars are being taken off the books as traders are blinded by the light of the strong retail sales figure from July. They apparently don’t care that June’s number wipes out July’s total. And Chuck is concerned that the Chinese haven’t reacted to the weak data last week like he thought they would.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning