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%.
Softness in September’s retail sales further support Fed rate increase in March
Ken Engelke
Chief Economic Strategist Managing Director
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