Tuesday, May 15, 2018

Retail sales decent in April. So why did Wall Street freak out?

For the second time in a few days, I found myself confused over Wall Street’s take on an economic report. Today it was the retail sales report, which came out this morning to generally strong reviews in the financial media.
U.S. retail sales rose in broad fashion last month as bigger after-tax paychecks helped compensate for rising fuel costs, signaling consumer demand was off to a firm start this quarter.

The value of sales increased 0.3 percent in April, matching the median forecast, after a 0.8 percent advance in the prior month that was stronger than initially reported, Commerce Department figures showed Tuesday.

So-called retail-control group sales, which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations, improved 0.4 percent after an upwardly revised 0.5 percent gain.
So the increase was in line with what was expected, and if you dig into the report, there really wasn’t any difference than what we’ve been seeing.

It’s worth reminding you that the retail sales figures are not adjusted for inflation, so given that the CPI rose by 0.2% for April, a 0.3% for sales is barely any kind of real increase. I suppose the stronger revision from March’s report means things are better than we thought, but it’s not like things are booming to another level of growth.

In fact, it’s the higher price of gasoline that is a main culprit, as gasoline sales were up by 1.3% vs March, explaining more than 1/3 of the overall growth in sales. In fact, higher gas prices is the main item that has prevented the growth rate of sales from declining noticeably from this time last year.

12-month change, retail sales
All sales
Apr 2018 +4.7%
Mar 2018 +4.9%
Dec 2017 +5.1%
Sep 2017 +5.0%
Jun 2017 +3.0%
Apr 2017 +4.6%
Dec 2016 +3.6%

Sales MINUS gasoline
Apr 2018 +4.1%
Mar 2018 +4.4%
Dec 2017 +4.8%
Sep 2017 +4.7%
Jun 2017 +3.3%
Apr 2017 +4.1%
Dec 2016 +3.3%

Regardless of what looks to me like “meh” retail sales numbers, Wall Street thought it meant that the economy would pick up, and that prices would pick up as well. And they weren’t happy about it.
The bond market sell-off began after the government said retail sales grew at a healthy pace in April, signaling the economy started the second quarter on a positive note. Relatively weak retail sales in February and March were revised higher, another sign of firmer inflation…

Although rates remain relatively low, the speed of the move spooked some investors. The 10-year Treasury started the day at just 2.99%. And as recently as September, it was just above 2%.

Treasuries have come under selling pressure this year because of concerns that faster inflation will force the Federal Reserve to raise interest rates. A rapid rise of Treasury rates in late January and February caught investors off guard, causing stocks to tank.
This is the exact opposite of what Wall Streeters were thinking last week, when they claimed a 2.45% year-over-year increase meant that inflation was under control (despite it being the highest increase in over a year), and stocks went up.

A minor rally in the last 15 minutes of trading limited losses in the DOW Jones to 193 points, and the 10-year bond yield dropped back to 3.07%. But it was still a notable change from the figures what we had going into today, and given the relatively steady-but-not-spectacular retail sales figure, I’m not sure why there was such a strong reaction.

That is, unless the “wise guys” are catching up to the reality that the average person really is getting pinched by higher gas prices, especially with wage growth not being any better than last year, and sold off because they think the economy and its inflated corporate profits are going to slow down soon.

What the retail sales report tells me is that despite 3 months of higher take-home pay, there is little evidence the tax cuts are making American consumers open up their wallets, except to pay more at the pump. Keep an eye on this in the near future to see if these higher gas prices and higher interest rates start affecting through other sectors in the economy in the coming months. If it does, hold on tight, because we may start losing altitude quite quickly.

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