Turkey crisis and retail sales can move rates this week

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Published Date 8/13/2018

A sizeable decline in interest rates and a big decline in stock indexes occurred on Friday. Turkey’s currency crashed and President Trump increased tariffs on Turkey’s steel and aluminum. The president is not happy with Turkey’s aligning with Russia to use its missile defense system and refusing to release an American pastor imprisoned there. The issue with the defense system is that Turkey is set to buy a number of US F-35 fighters, raising concerns that Russia will use the F-35s to find weaknesses in their systems that could be exploited.

Turkey’s markets are still volatile this morning; every major equity market is in decline following Friday’s global decline. Turkey’s worsening currency crisis is persuading investors to dump equities and emerging markets and flee to safer assets such as government bonds and the dollar. Trading in the US dollar this morning relatively unchanged from the increase seen on Friday. The bond and mortgage markets in very early trade (7:00 am EST) were slightly better with the 10-yr at 2.86%, down 1 bp from Friday’s close; at 9:00 am the 10-yr remained unchanged. MBS prices tailed off with the 10-yr edging back.

There are no economic reports today.

At 9:30 am the DJIA opened +31, NASDAQ +12, S&P +3. 10 yr note 2.88% +1.5 bp.

Friday saw a huge increase in the dollar; this morning the dollar is fractionally weaker but essentially holding all of Friday’s increase. The world is jumping to the dollar on the potential of spreading contagion from Turkey’s crumbling lira. The rush out of international stocks to US Treasuries pushed the July low on safety concerns. This morning there is no real follow-through so far. The Turkish event was one of those unexpected market events that triggered rapid movements in markets. Emotions are now more under control, although there has been no improvement in the situation.

The Turkey situation will soon be put into a wider perspective by investors. US economic growth won’t be affected and the Fed is poised to increase short-term rates in September. The more immediate concern is the over-valued equity market; there is a consensus among money managers, economists, and investors that the overall value of equity markets has become excessive; a break in stocks will add some support to rates, keeping increases moderate.

This Week’s Calendar:

Tuesday,

6:00 am July NFTB small business optimism index (107.10 frm 107.20)

8:30 am July Import and Export prices (imports +0.1%, exports +0.2%

Wednesday,

7:00 am weekly MBA mortgage apps

8:30 am July retail sales (+0.1%, ex autos +0.4%)

Q2 Preliminary productivity and unit labor costs (productivity +2.5%, unit labor costs -0.2%)

August NY Empire Sate manufacturing index (20.0 frm 22.6)

9:15 am July industrial production and capacity utilization (production +0.3%, cap utilization 78.2% from 78.0 in June)

10:00 am June business inventories +0.1%)

August NAHB housing market index (68 unchanged from July)

Thursday,

8:30 am weekly jobless claims (215K +2K)

July housing starts and permits (starts 1271K +7.3%, permits 1307K +2.6%)

August Philadelphia Fed business index (22.5 from 25.7)

Friday,

10:00 am August University of Michigan mid-month consumer sentiment index (97.9 unchanged from July)

July leading economic indicators (+0.4%)

Source: TBWS

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