Morning Report: Retail Sales rise while consumer sentiment falls

Vital Statistics:

  Last Change
S&P futures 4,448 19.2
Oil (WTI) 82.13 0.39
10 year government bond yield   1.57%
30 year fixed rate mortgage   3.22%

Stocks are higher this morning as good numbers are being reported by the banks. Bonds and MBS are down.

 

Retail Sales rose 0.7% MOM, which was well above the consensus. Ex-vehicles and gas, they rose 0.7% as well. This report covers the back-to-school shopping season, which is a good indicator of what the holiday season will look like. That said, we have no problem with demand right now, the problem is supply. Higher gas prices were a big factor in the increase, as they are up 38% YOY.

“Services spending may see some renewed strength over the next couple of months, as virus cases continue to drop back,” Capital Economics senior U.S. economist Andrew Hunter wrote. “But with goods shortages likely to persist, and the resulting surge in prices eating into real incomes, we expect consumption growth to remain subdued.”

 

The supply issues are also evident in import and export prices. Import prices rose 9.2% on a YOY basis, while export prices rose 16%.

 

Jerome Powell is still expected to be re-nominated to run the Fed, however he is getting some pushback from the hard left, particularly Elizabeth Warren. If he isn’t the nominee, Lael Brainard, who was nominated by Barack Obama, seems to be the next best bet. Brainard is considered more dovish than Powell, however that probably doesn’t matter all that much – after all the FOMC is a committee and decisions are usually arrived by consensus and voting.

“You could see a different path of monetary policy with a Brainard-led Fed” that pushes back initial interest rate hikes and follows with a shorter tightening cycle, said Paul Herbert, Managing Director at Harbor Capital Advisors, who expects Powell to be renominated but is preparing to hold shorter duration bonds for longer in the case of a Brainard-led Fed.

 

Consumer sentiment slipped in October, according to the University of Michigan Consumer Sentiment Survey. The numbers are well below September’s numbers and October 2020’s. The survey blames the debate in DC over the stimulus bill and the debt ceiling, but IMO that stuff probably doesn’t resonate with the typical US citizen.

If you look at consumer sentiment surveys historically, they have historically correlated (negatively) with gasoline prices, and I suspect that is what is driving the numbers. If gas prices rise, people’s mood sours. That said, the Delta variant of COVID is probably playing a part too.

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