US stocks opened lower. Markets are giving back some of Wednesday’s rally this morning following losses in China overnight and amid ongoing concerns about COVID-19 hotspots. In the United States, markets will watch earnings reports, retail sales, and weekly jobless claims for direction. Chinese stocks sold off on soft retail sales, despite better-than-expected second quarter gross domestic product (GDP), as the Shanghai Composite fell 4.5%. Hong Kong’s Hang Seng slid 2.0%, and Japan’s Nikkei lost 0.8%. European markets are showing similar declines as the United States after the European Central Bank (ECB) announced no policy changes.
China’s economy grew faster than expected. China reported a 3.2% year-over-year increase in GDP for the second quarter, slightly ahead of Bloomberg’s consensus expectations at 2.4% and a strong rebound from the 6.8% decline in the first quarter. China has led the way out of the health crisis and is expected to be among the first economies in the world to recover lost output. Overnight, however, markets seemed more focused on the surprising 1.8% year-over-year decline in Chinese retail sales and 8.2% drop in auto sales, cited as reasons for the selloff in Chinese stocks.
Bearish backdrop for the greenback. The twin deficits of trade and budget in the United States are widening, which we expect will put downward pressure on the US dollar. Historically, widening deficits have led dollar weakness by about two years, so this story may take time to play out. Bloomberg’s US Dollar Index is down 7% since the S&P 500 Index bottomed March 23, but it’s still up 1.7% year to date.
Retail sales surprise again to the upside. Retail sales for June beat expectations with a 7.5% month-over-month increase, compared to Bloomberg’s consensus expectations for a 5% gain. Excluding autos and gas, sales rose 6.7%. Consumer spending has a long way to go to return to 2019 levels and unemployment remains very elevated at over 11%; however, the strong rebound in May and June is encouraging, and we expect additional, but more gradual, gains in the second half. (Source: US Census Bureau)
Claims leveling off. Filings for initial jobless claims totaled 1.3 million for the week ending July 11, down only 10,000 from the prior week and above Bloomberg’s consensus forecast of 1.25 million. Claims have fallen 15 straight weeks, and continuing claims fell to 17.3 million for the week ending July 4. However, the still-elevated jobless numbers and leveling off of the trend suggest the job market likely may take some time to heal, and the latest COVID-19 outbreak may have slowed the progress. (Source: US Bureau of Labor Statistics)
Fed Beige Book shows rebound in sentiment. The July iteration of the Federal Reserve (Fed) Beige Book revealed that the reopening of the economy has lifted Main Street sentiment off the depressed levels seen in May. It notes a pickup in activity across Fed districts, particularly in retail and manufacturing. Despite the rebound in sentiment, however, many businesses reported concerns over the recent rise in COVID-19 cases and the effect this may have on consumer demand. We take a closer look later today on the LPL Research blog.
Midyear Outlook 2020 is here. LPL Research’s Midyear Outlook 2020: The Trail to Recovery reviews where we’ve been in 2020, where we may be heading, and the path that will take us there. Our special elections section explains how stocks and the economy may predict the next president. Find supporting marketing material on the Resource Center, including a PDF, printer-friendly version, client letters, Social Sharing Guide, and Executive Summary. Printed brochures can be ordered now in Marketing On Demand to ship August 1.
COVID-19 news. A portion of Wednesday’s more than 66,300 new cases may be explained by a 66% jump in testing. Meanwhile, the curve is flattening some, with new cases up 12–13% week over week over the past two days, well below the recent peak in case growth (source: Johns Hopkins). The national trend in hospitalizations appears to be falling. Oxford University’s vaccine candidate is getting some good press as we await trial results in the coming days.
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