US Close: Stocks pop on strong retail sales report but drop 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.

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