Retail sales in July were weaker than expected. Sales ex auto’s and gasoline fell .1% instead of rising by 3 tenths as expected. Revisions netted out to no change in the two prior months. Also taking out building materials to get to the so called ‘control group’ saw sales flat m/o/m vs the estimate of up .3%. Vehicle sales rebounded by 1.1% m/o/m but are now down by .4% y/o/y. Furniture sales rose too m/o/m while the real strength remained for online retailing where sales rose 1.3% m/o/m and 10.1% y/o/y. Sales declines m/o/m were seen everywhere else, in electronics (down 4.2% y/o/y), building materials (down 1.6% y/o/y), food/beverages (up 1.2% y/o/y), clothing (down 1.3% y/o/y), sporting goods (up 1.9% y/o/y), department stores (down 4.2% y/o/y) and restaurant/bars (but still up 6.1% y/o/y). With the decline in gasoline prices, gas station sales fell 2.7% m/o/m and 11.4% y/o/y.

Bottom line, core retail sales were not only flat m/o/m but the 3.3% y/o/y rise is the slowest in 4 months. This compares with the 5 year average of 3.6%. Going further back for perspective, core sales ran at a 5% rate in the mid 2000’s recovery and 5.5% in the late 1990’s. We entered the week with the consumer being a key focus and we end the week with very mixed signals. Department store stocks have crushed the shorts with better than expected expense management but headline comps that are still soft and y/o/y sales declines. Some retailers talked about promotional headwinds, reduced tourist spending, and macroeconomic headwinds but others dealt with it better than others. For restaurants, fast food/fast casual are a mixed bag too.

Thus, with the consumer being the last firewall between economic expansion and contraction in the US, we’re now seeing some uneven behavior. Income growth is still mediocre notwithstanding our hopes of acceleration and maybe that is why the savings rate has fallen by 9 tenths over the past 3 months to June and revolving credit outstanding (mostly credit cards) is up by almost 10% at annualized rate as of June. It’s certainly better to have income growth drive spending rather than a drawdown on savings an increase in debt.

The UoM preliminary consumer confidence index for August was 90.4, about 1 pt below the estimate of 91.5 but up a touch from 90 in July. The internal components were mixed as Current Conditions fell 2.9 pts to a 5 month low but Expectations rebounded by 2.5 pts after falling by 4.6 pts in July. One year inflation expectations moderated by two tenths to 2.5% likely in response to the drop in gasoline prices as that is a high profile price point that people see every day. The main disappointment within the index was Net Income which fell 2 pts to the lowest level since December. The offset was employment expectations improved to a 3 month high. As for spending considerations, those that plan to buy a car fell to match the lowest since December. That squares with what we heard from Ford a few weeks ago. Those that think it’s a good time to buy a major household item fell 6 pts to a 5 month low. Housing intentions were mixed as those that think it’s a good time to buy rose to the highest since January but those that think it’s a good time to sell a house rose to the highest since 2006. Remember then?

Bottom line, the 90.4 print compares with the ytd average of 91.5 and 92.9 in December. Thus, confidence has been essentially flat lining over the past few years but still at pretty good levels. The high in this cycle was in January 2015. What explains the recent stagnation? I’ll say, lackluster income growth, an ever rising cost of living for many (due to healthcare, rent, property taxes, and many other services overwhelming cheaper smart phones, gasoline and clothing) and too much debt still (especially for younger people) where all of the above is being fully expressed in the country’s election and primary choices. Holding confidence together on the other hand is good job growth, full employment for those looking, wage growth for skilled workers, and record highs in stocks.

Business inventories in June rose .2% m/o/m, one tenth more than expected and with a 1.2% sales gain, the inventory to sales ratio fell to 1.39 from 1.40. That is the lowest since November but still remains elevated and not far from the highest since 2009. Of note, retail inventories of auto’s/parts are up 10.9% y/o/y and the I/S ratio rose to 2.28 from 2.27, the 2^nd highest level since January ’14. Bottom line, Q2 GDP estimates may get revised up a hair based on this number as we know there was outright destocking seen in inventories within the first Q2 GDP report. Also expect Q3 GDP estimates to get revised down after retail sales.

As for what today’s economic data means for markets, the most noteworthy move is in US Treasuries on the weaker than expected retail sales report. The US 2 yr note yield touched 75 bps this morning pre release and now is at 70 bps. The 10 yr touched 1.58% yesterday and is at 1.50% right now. The US dollar is at a 1 ½ week low. Stocks don’t care (brainwashed by low rates) even though we keep discounting lower earnings at this lower discount rate.

Elsewhere, the dangers of our modern day monetary excesses has just arrived in a new place and IF (I emphasize IF) it spreads, Mario Draghi and the ECB will have an uprising at its doors. Last night, Bloomberg news reported that “this week, a German cooperative savings bank in the Bavarian village of Gmund am Tegernsee, population 5,767, said it’ll start charging retail customers to hold their cash. From September, for savings in excess of 100,000 euros, the community’s Raiffeisen bank will take back .4%.” That is the same level as the ECB’s negative deposit rate. This bank has been charging business clients that same penalty and a board member of the bank said “so why should it be any different for private individuals with big balances?” I’ll take a bottom line from the story: “in principle the ECB’s negative deposit rate was meant to encourage spending and investment in the euro area’s sluggish economy, not to tax thrifty Bavarians.” I’ve called NIRP a Weapon of Mass Confiscation and this is another perfect example. NIRP is the dumbest monetary initiative the world has ever seen. Bottom line, monetary policy is damaging global growth, not facilitating it and we are seeing more and more evidence of policy backfiring.

Loan growth in China slowed dramatically in July. Aggregate financing totaled 488b yuan, less than half the estimate of 1T and down from 1.63T in June.  It’s the lowest pace of increase since July 2014 and down 34% y/o/y. Of this total, bank loans made up 464b. Thus, the credit extension on the shadow side was essentially near zero. M2 money supply growth also slowed to a growth rate of 10.2% y/o/y vs the estimate of 11%, down from 11.8% in June and the slowest rise since May 2015. Bottom line, China has a massive credit bubble on its hands so I’m happy to see the credit slowdown but this will be a painful adjustment and one that has to occur nonetheless.

The other Chinese economic data also missed expectations. Industrial production in July rose 6% y/o/y, two tenths less than expected. Retail sales were up by 10.2% y/o/y, three tenths below the forecast. Fixed asset investment ytd y/o/y grew by 8.1% vs expectations of up 8.9%. Notwithstanding further signs of a Chinese slowdown, the response in their stock market was the same globally, higher. The Shanghai comp was up by 1.6% and the H share index rallied by 1.4%. The yuan though is lower and copper is down by 1.6% to just off the lowest level in a month.

Hong Kong’s economy in Q2 benefited from the stimulus driven stabilization in China as it grew 1.7% y/o/y, above the estimate of up .9%. On a q/o/q basis GDP was up by 1.6% after contracting by .5% in Q1. The estimate was for up .5%. Goods exports rebounded which offset a slowdown in retail sales. The Hang Seng was up by .8% to close at its best level since November.

The Euro area economy was confirmed in the revision that it grew by .3% q/o/q, in line with the estimate and the first print. The Germany economy surprised to the upside with .4% q/o/q growth, twice expectations but Italy saw no growth vs the forecast of up .2%. Italy now joins France as seeing zero growth in Q2. We are just two months away from a crucial vote in Italy on whether to eliminate the upper house of parliament which would ease law making (Italy has had 60 different governments over the past 70 years) and if it loses, Renzi resigns and Italy will be even worse off. This GDP data is of course pre Brexit.

Initial jobless claims totaled 266k, about in line with the estimate of 265k and vs 267k last week which was revised down by 2k. The 4 week average did rise to 263k from 260k as a print of 254k dropped out of the average. Continuing claims, delayed by one week, rose by 14k. Bottom line, this weekly data point remains a broken record in a good way in that the pace of firing’s remains muted. This is also not inconsistent with the slowing pace of job gains as we approach the 8^th year of this expansion and there are less available bodies to hire.

Import prices in July surprised to the upside by .1% m/o/m vs the estimate of down .4%. Also, June was revised to a jump of .6%, 4 tenths more than the first print. On a y/o/y basis, the decline was still 3.7% but that is the least since November 2014 as the commodity/oil comparison gets easier. Prices ex petro were down by 1.3%, the least since January ’15. Bottom line, with the dollar no longer rallying and commodity prices no longer going down, import prices should continue to trend up on a rate of change basis. For many meetings, the Fed has cited “declines in non energy imports” as one of the reasons that inflation is running below their 2% objective (because they look at PCE and not CPI) and that worm is now turning.

After a pretty good 10 yr note auction yesterday, the 30 yr bond auction today wasn’t as good and mostly uneventful. The yield of 2.274% was about in line with the when issued but the bid to cover of 2.24 was below the previous one year average of 2.36. Dealers got stuck with 28% of the auction, about the same level of 29% averaged in the previous 12.

Bottom line, with the influence of insurance companies and pension funds in the very long end of the curve, it’s always not easy gauging the reason for the buying but yields continue higher post results. The long bond is down more than a full point today with the yield up 5 bps and the 10 yr yield is up by the same amount to 1.55%. The question remains and what should be the key focus of us all is whether the post UK vote rally in bonds and plunge in yields was the blow off rally in sovereign bonds. I bring this possibility up again just because of what’s happened in the JGB market over the past few weeks. Don’t go to bed at night without catching a glimpse of the JGB market as if there is a canary out there, that is where it will be. Also, with the cost of hedging out FX risk now being expensive, don’t rely anymore on a flood of foreigners trying to pick up a few bps of yield in US Treasuries. Unless of course they are willing to take the FX risk. For those that did in Japan who received about 1.9% on average over the past year in the US 10 yr, they gave back 20% on the yen rally.

A funny thing happened on the way to more QE from the BoE as some investors wised up and decided to not sell their longer dated paper (15 years+) to the BoE. After all, why give up higher yielding bonds when the alternatives with the cash are pathetic? Why would any insurance company or pension fund sell their longer term bonds? We’ll soon see if this was a summertime blues thing or something more in the next attempt but if it’s the latter and investors are finally saying ‘no mas’, the BoE would join the BoJ in reaching some logistical limits to this experiment. Because of the supposed possible scarcity now on long term gilts, yields fell to .54% in response, so the BoE is getting what they want anyway. I give my sympathy though for many others who are suffering from the collapse in yields and the yield curve.

The BoE was successfully able to buy today’s allotment of 7-15 year paper. The issue yesterday was for those maturities greater than 15 years and the BoE will try again that far out on the curve next week. The 10 yr gilt yield jumped by almost 4 bps off its lows in response.

In my now daily LIBOR look, 3 month LIBOR is now above .80 bps for the first time since May 2009. Again, we know why it’s happening but the key question is whether it falls back down again after the transition from prime to government money market funds plays itself out. Either way for now, $150 Trillion tied to US dollar LIBOR will see a higher cost of capital.

US mortgage applications rebounded after 3 weeks of declines. Purchases rose 2.6% w/o/w off the lowest level since February and are still up by 13% y/o/y. The lumpy recovery continues. Refi applications were up by almost 10% w/o/w and 65% y/o/y.

With one of my key focuses this week being the US consumer and retail earnings, after Coach yesterday cited “significant and unanticipated volatility in tourist spending flows, as well as macroeconomic and promotional headwinds” impacting their business, today Michael Kors said in its release that its business was affected by “the continued decline in mall traffic trends as well as a decrease in tourism in certain major cities which negatively impacted our comp sales performance during the quarter.” Wendy’s seems to have had a better than expected quarter but mentioned “challenging industry conditions” in its release.

After a few months of weak data, Japanese machine orders in June rose 8.3% m/o/m which was above the estimate of up 3.2%. For the quarter, orders were still down 9.2% from Q1 and on a y/o/y basis orders fell .9% y/o/y, the 3rd month in a row of declines. To put this important capital spending number into perspective, the index is at 850. The pre recession peak was 1063. The Nikkei was down slightly overnight and the yen is rallying to a stone’s throw from 100.

French industrial production was really weak in June. It fell .8% m/o/m vs the estimate of up .1%. It’s the 4th month in the past 5 that saw a drop and the y/o/y drop of 1.3% was the most since November 2014. Manufacturing production (capital goods in particular) led the decline as it fell 1.2% m/o/m and 1.5% y/o/y. We’ve already seen the first look at Q2 GDP from France which saw no growth so this data points confirms the weakness. As its pre UK vote, we of course look forward to July and August data to see what, if any, collateral economic damage we’ll see. The CAC is down by .25% along with the rest of Europe.

The number of job openings in June totaled 5.62mm, not far from expectations of 5.67mm but up from 5.5mm in May. Private hiring’s improved by 120k after May’s lowest level since December. As separations fell, the hiring rate rose one tenth to 3.6% but that is no different than what was seen one year ago. The recent high was 3.8% in February. The amount of those quitting their jobs fell back to the April level but the quit rate remained unchanged at 2%. Bottom line, the number is somewhat dated but does correlate with the bounce back seen in the BLS jobs data for June. The trend though remains the same with a slowing pace of job growth but that should not be a surprise as we approach the 8^th year of this economic expansion.

My focus this week is twofold. First is on the US consumer as we know that is the only thing keeping the US economy out of recession. After hearing apprehensive comments about spending over the last few weeks from Ford, Starbucks, Dunkin Donuts and Yum Brands, we heard this (lost in the euphoria of the good payroll report) from QVC on Friday: “Beginning in early June QVC’s US sales began to experience significant headwinds, which have continued. The sales declines, as compared to prior periods, have averaged in the mid to high single digit percentages.” We get earnings releases this week from Coach, Ralph Lauren, Michael Kors, Nordstrom, Kohl’s, Macy’s and JC Penney. Department stores certainly have their own issues but we’ll see what, if any, insight they can give on the consumer. We also see July retail sales on Friday.

The other area of focus is the action in sovereign bonds. The Japanese 10 yr is now just 5.5bps from zero, up by 4.5 bps overnight, the least negative since late April and versus -29 bps 2 weeks ago and I view their bond market as the possible canary after what the Abe government and the BoJ did or didn’t announce last week. Also and maybe most importantly this comes as the BoJ and BoE and maybe the ECB are realizing that negative interest rates is a really bad idea. After all, it’s been negative rates predominately from the BOJ and ECB that was the trigger for so many trillions of negative yielding paper. The Japanese government is auctioning off 30 yr paper tomorrow. The 30 yr yield was up by 3 bps to .42%, the highest since early April. There is no spillover today from JGB weakness to Europe and the US but there was last week. For those that think foreign money continues to pile into US Treasuries in a yield grab, no longer as the cost of hedging FX exposure has gotten too expensive. Read this article from BN, //www.bloomberg.com/news/articles/2016-08-07/bond-market-s-big-illusion-revealed-as-u-s-yields-turn-negative

With respect to the Fed and their response to Friday’s jobs number, unfortunately we won’t hear from any of them until next week. They face the dilemma of mediocre economic output, good hiring, punk productivity and falling corporate profit margins as a result. Rate hike odds are just 26% for September and 42% by year end. If they have any desire to use that September meeting as an opportunity, expect Janet Yellen to lay the ground work in Jackson Hole in a few weeks. The recent Fed creation called the Labor Market Conditions Index that supposedly gives them a broad look at the labor market is released today for July at 10am. It’s been negative for 6 straight months for the 1^st time since ’08-’09.

US dollar LIBOR for 3 months finished last week at .79%, up more than 3 bps on the week and higher by almost 50 bps y/o/y. I found a stat from Fed Governor Jerome Powell in a speech he gave in 2014 where he said “there are an estimated $300 Trillion in LIBOR contracts, roughly half which reference dollar LIBOR.” Thus, $150 Trillion of loans/swaps are going to see higher funding costs. The real question is after this shift from prime money market funds into government Treasury focused funds has run its course, does LIBOR fall back down again or not.

Chinese exports in dollar terms fell 4.4% y/o/y, slightly below the estimate of down 3.5% with declines seen to all regions of the world. Yuan weakness cushioned the soft trade data as in yuan terms exports were up. Imports in both currencies fell with fake invoices still a problem with Hong Kong as imports from there miraculously rose 123% y/o/y. The decline in imports in dollar terms of 12.5% is in part to the weaker yuan but also lessened demand for goods. Also out of China over the weekend was their FX reserve data where they stood at $3.2T in July, in line with expectations and down slightly from the $3.205T seen in June. The low was $3.19T in May. The yuan was higher in July vs the US dollar but has started weakening again in the first week of August. The yuan panic of August 2015 has been forgotten for now even though the currency is even weaker since. The Shanghai comp closed up .9% while the H share index jumped by 1.6% in joining the global rally post US jobs report.

After seeing weak German factory orders and industrial production misses from France, Italy and the Netherlands last week, today German IP was up by .8% m/o/m, better than expected when we include the upward revision to May. The y/o/y data though was in line. We know the German economy continues to carry the region but their export heavy economy is not immune from soft global trade.