Daily Commentary

MarketMinder’s View: The Census Bureau’s retail sales report for September is likely to be delayed due to the government shutdown, but all isn’t lost! “The Chicago Fed Advance Retail Trade Summary estimated that retail sales excluding autos and parts increased by a seasonally adjusted 0.5% last month after advancing 0.7% in August. ... CARTS is meant to offer an early read for the official monthly retail sales data, excluding automobiles, produced by the Commerce Department’s Census Bureau. The comprehensive retail sales report, scheduled for release on Thursday, has been delayed by the government shutdown, now in its third week. When adjusted for inflation, retail sales excluding autos are projected to have risen only 0.2% last month after increasing 0.3% in August. CARTS’ projections are broadly in line with most estimates from independent economists and other surveys.” Like the official report, this is backward looking, and retail sales don’t reflect most personal consumption expenditures (which are mainly services). But the other spending measures here are a helpful pencil sketch. Now, the piece spends a good amount of pixels on how “Retail sales and consumer spending growth continue to be driven by higher-income households,” but that is sociology, which markets don’t primarily dwell on. Stocks are cold-hearted and care more about the big picture: overall economic growth’s contribution to earnings over the next 3 to 30 months. Who is doing the spending isn’t as consequential for markets. For more on why, please see, “So Go the Top Earners, So Goes the Economy?”

MarketMinder’s View: Tensions were on tenterhooks ahead of a 20-year Japanese government bond (JGB) auction, fearing fallout from the ruling coalition’s recent split. But while sentiment can sway bonds just like stocks (though usually more moderately), what matters most for investors is that borrowers pay the money back with interest. On that score, the JGB auction passed with flying colors: “Japan’s first sale of government bonds since the ruling political coalition crumbled drew firm demand as higher yields attracted investors, bringing more comfort to global debt markets. A key gauge of demand at the 20-year auction Wednesday was above the 12-month average for that tenor. The sale follows two smooth offerings last week, pointing to an easing funding environment in Japan even amid political turmoil.” While we don’t yet know the configuration of Japan’s government, it doesn’t seem to be affecting JGB demand much. “The bid-to-cover ratio came in at 3.56, compared with 4 at the previous auction and an average of 3.25 over the past year.” That is, demand for the new 20-year JGB issues was more than three times the amount on offer. Reality exceeds expectations once again, more global bull market fuel.

MarketMinder’s View: Because this article names specific companies involved in the titular bankruptcies, we remind readers MarketMinder doesn’t make individual security recommendations—our interest is only with the broader theme: scaling the alleged credit risks for proper perspective. The piece describes two recent automotive-related bankruptcies—subprime lender-dealership Tricolor and auto-parts supplier First Brands—and the potential effects on their web of creditors. Bankruptcies kick off a process to determine who gets what, which is a normal part of the lending business—and capitalism—which the article details well (e.g., exploring the companies’ liabilities, how much was unsecured, the various credit structures and what lenders are on the hook for). Naturally, though, with back-to-back bankruptcies, some see a nascent trend: Is there a common denominator that could lead to more trouble in the lending space—and what are the broader market implications? The reaction here seems sensible enough to us and suggests sentiment isn’t too far ahead of its skis: “The credit rally, which got off to a robust start earlier in October, has hit a speed bump in recent days as investors reduced exposure to certain sectors over concerns around weakness in consumer and auto lending, experts said. ... To be sure, the collapse of First Brands is unlikely to cause a widespread global meltdown across credit markets, some experts said. ‘On a deal-by-deal basis, we don’t see conditions in the leveraged finance markets as materially different from historical norms,’ said [one analyst].” Indeed, according to Bank of America data, high yield (those with low credit ratings) corporate default rates at 1.2% through September are below their 4.0% historical average. High yield credit spreads, which measure investors’ risk perceptions, have widened to 3.11 percentage points (ppts) from September 22’s 2.69 low (after Tricolor’s September 10 bankruptcy) and January’s near-record 2.59 low. But going back to 1996, the average is 5.23 ppts. Meanwhile, investment grade corporate credit spreads are at 0.81 ppts. Though up in recent days, they aren’t far off record lows and remain well below average. Sentiment can swing credit markets just like stocks, but when those most exposed collectively suggest keeping calm and carrying on, listening to the market seems wise to us.