Rise and shine everyone.

Today’s focus will be the US Retail Sales numbers ahead of the Fed meeting tomorrow. The market has now shifted quite a bit to pricing in a 50bps cut.

Japanese markets reopened today after being closed for a holiday yesterday, while China and South Korea remain on holiday. The Nikkei dropped over 2% in morning trading, driven by a stronger Yen. In contrast, the Hang Seng outperformed, rising 1.4% in the morning.

Japanese chipmakers Advantest and Tokyo Electron saw significant losses, falling 6-7%, far exceeding Nvidia's 2% decline in New York trading. The declines follow an FT report indicating that the U.S. and Japan are close to reaching a deal to restrict technology exports to China.

Meanwhile, Japan’s JGB yields edged down slightly after the holiday, in line with the global decline in yields yesterday. Asian markets await both the Fed on Wednesday and the BoJ on Friday.

European markets are looking slightly better this morning despite abysmal sentiment readings from the EA and Germany. German ZEW Current Conditions Index reached -84.50, a low last seen in May 2020 during the pandemic.

US Equity Futures are trading higher this morning, as is the 2Y yield! Commodities remain mixed. Crude Oil is holding on to 70.

US Retail Sales Preview

The consensus estimate is for a fall in Retail Sales by -0.2% MoM but an increase of 0.2% MoM for Retail Sales ex-Autos. There will likely be some benefit from a decline in gasoline prices but, we’re also seeing a slowdown in spending overall, particularly from the low-income consumer. We saw Dollar General and Dollar Tree - neither had anything good to say.

Nevertheless, we could see some seasonal improvements because of Back to School spending. So, if Retail Sales comes in higher than expected that could be a sign that the economy is still okay. Given that the market is pricing in a 50bp cut based on a deteriorating economy, this could set expectations back a little and we could see the S&P 500 rise.

An ugly print however could mean that bonds are right in pricing in a much deeper cut and we could see a rotation to defensive equities and an overall decline.

Here is a look at the MoM in Retail Sales by component over the last two months.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)