Turkey Fallout and Tariff News Will Dominate This Week’s Trade

Aug 13, 2018
Turkey Central Bank

Geopolitical Events Will Drive this Week

Despite having an eclectic mix of data in which to choose from this week headlined by the July Retail Sales Report, the market will be more focused on any additional fallout from the Turkey/Emerging Market situation and, of course, any additional salvos that might be fired in the trade war front. Look no further than Friday’s reaction to the July CPI report which certainly contained enough to elicit some Treasury selling what with the highest core rate in ten years; alas, the market was more worried over possible contagion from Turkey’s currency collapse and rallied. Truth be told, real average hourly earnings declining –0.2% YoY provided some inflation-soothing salve to the CPI report.  Looking ahead, July Retail Sales (Wed.) and Housing Starts (Thurs.) will be the key releases for the week.



Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar


Top Events of the Week Top 5 Events for the Week

AUG 13 - 17,  2018

1. Geopolitical Eventsd — All Week
2. July Advance Retail Sales — Wednesday
3. July Housing Starts & Permits — Thursday  
4. July Industrial Production — Wednesday
5. U. of Michigan Consumer Sentiment — Friday



1.  Geopolitical Events — All Week

The Turkish Lira’s collapse last week is continuing this morning and will be a lingering concern for the market despite a solid calendar of economic data. By itself the drop in the Turkish currency wouldn’t be a big concern but the extent of the collapse and the potential impact to EU-based banks that have Turkish exposure is one risk, but the more considerable concern is that the currency run spreads to other emerging market countries that have dollar-denominated debt. A currency decline that spreads to other emerging markets would effectively increase borrowing costs for those typically resource-dominated economies. The impact in the U.S. would be lower import prices given the cheaper currencies and a likely slowing in economic output from the tightening financial conditions. Thus, you can see the bullish impulse to Treasuries that flows from the events, and as such traders will be watching like hawks for signs the currency run is spreading or remaining more localized in Turkey.


2.  July Advance Retail Sales — Wednesday

The July Retail Sales Report is due Wednesday and expectations are for most key metrics to trail June but the all-important Control Group reading (which is a direct GDP input) is expected to post a rebound to 0.4% versus a disappointing unchanged June reading. Overall sales are expected up 0.1% versus 0.5% in June while sales ex-autos & gas are expected up 0.4% versus 0.3% in June. The rub, however, is that this release is reported nominally and thus not inflation-adjusted. Therefore any uptick has to be considered in light of inflation readings from last week showing a decent bump in prices.  If inflation-adjusted, sales are probably showing only modest gains of late and that’s an issue that could temper third quarter GDP figures as those numbers are reported net of inflation.


3.  July Housing Starts & Permits — Thursday

After a disappointing June, housing starts for July are expected to increase 7.4% month-over-month with an annualized starts number of 1.260 million versus 1.173 million in June. The average over the past year has been 1.253 million so a slightly above-trend starts number is expected with a sequential increase versus June. Permits, which aren’t subject to the vagaries of weather which can impact the starts number, are expected to increase slightly to 1.310 million annualized versus 1.292 million the prior month. The average over the past year has been 1.318 million, so a slightly below average print is expected but a slight sequential increase versus the prior month. In summary, the housing numbers this week are expected to show a slight bounce back from a somewhat disappointing June but the rebound is expected to be modest.


Building Permits Annualized


4.  July Industrial Production — Wednesday

Expectations are for July industrial production to increase 0.3% month-over-month versus 0.6% the prior month.   The average over the past year has been 0.3% so an on-trend print is expected. Stripping out the volatile utility component manufacturing is expected to be up 0.3% versus 0.8% the prior month.  The average over the past year has been 0.2% so a slightly above-average print is expected. Finally, capacity utilization is expected to be 78.2% versus 78.0% the prior month indicating excess capacity is slowly being taken up.


5.  August University of Michigan Consumer Sentiment — Friday

The preliminary read on August consumer sentiment on Friday is expected to print at 98.0 compared to June’s 97.9.  The sentiment index has averaged 98.1 over the past year so a near average reading is expected.  The survey also contains two inflation measures that are watched by the Fed. Consumers expect inflation over the next year to be 2.9% and the longer-run expectation (5-10 years) moderately lower at 2.4%. The next year inflation expectation has been edging higher of late and the Fed will be sensitive if consumers continue to ratchet-up expectations and that could give a boost aid the quarterly rate hike schedule argument.




Technicals Investment Yield Ranges Over Last Year


US Treasuries

FHLB Agency Bullets

Mortgage Backed SecuritiesMunicipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg





Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research




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