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Softness in September’s retail sales further support Fed rate increase in March

The softness in September’s retail sales offers further support that the Fed probably is not going to increase interest rates until March 2016. The 0.1% modest increase was partly due to a price related 3.2% drop in gas sales. Car sales were robust, rising by 1.7%.
The control group which strips out autos, gas and building materials fell by 0.1%. This data is used to calculate GDP. What is apparent is that households appear to be skipping shopping and instead banked their fuel savings.
This data coupled with inventories and a reduction in trade, third quarter growth should be around 2.0% The PPI reinforced the view inflation is not an issue.
This expected 2.0% growth rate and benign pricing pressures is the same environment described in the Beige Book describe albeit some districts are exhibiting more growth than others. Is this a reason why there is some dissention in the Committee/regional presidents? I think yes. This statistical reference will be used at the October 27-28 FOMC meeting.
Markets, led by Wal-Mart and other retailers, fell yesterday. The King of Retailers shocked all by announcing 2016 profits will be down 6% to 12% versus up about 4%, the result of increasing costs including hiking the minimum wage of its associates.
The disappointing retail sales figures only amplified the selloff. Boeing also sold off significantly following a comment by Delta’s CEO that there is a glut of wide body jets coming of leases creating an “aircraft bubble.” The Dow was down almost 1%.
The NASDAQ on the other hand fell about 0.25%.
What will happen today? Earning season continues and generally speaking results have exceeded expectations.
Last night the foreign markets were up. London was up 1.03%, Paris up 1.13% and Frankfurt up 1.50%. China was up 2. 32% Japan up 1.15% and Hang Sang up 2.0%.
The Dow should open moderately higher on the belief the Fed will keep interest rates at current levels for a longer period of time than previously expected. China rallied on the belief of greater reforms within their state own businesses following the announced reorganization of it telecommunications industry. The 10-year is off 9/32 to yield 2.0%.

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Ken Engelke

Chief Economic Strategist Managing Director

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