The Market Today

Retail Sales Add to Data Showing Consumer Resilience

by Craig Dismuke, Dudley Carter


Empire Fed Report Shows Activity Coming Back to Earth: The New York Fed’s October report on manufacturing activity in its region came back to earth a bit, falling from the surprisingly strong 34.3 back in September to 19.8.  The overall index remains positive.  The new orders index fell from 33.7 (highest reading since 2004) to 24.3, still the highest non-pandemic-recovery reading for the index since 2010.

Retail Sales Remain Stronger Than Expected in September: Nominal retail sales remained buoyant in September despite a confluence of concerns weighing on economists’ expectations.  Sales rose 0.7% MoM at the headline level versus expectations that sales would contract 0.2%.  Part of the strength was an increase in gasoline sales, up 1.8% MoM.  One notable surprise was a 0.5% MoM gain in auto sales after declining by an average of 3.2% per month in the previous three months.  However, even excluding autos and other volatile categories, core retail sales rose 0.8% MoM versus expectations for a 0.5% gain.  Across the various sectors, sales were broadly stronger and not reflective of either re-opening or social distancing trends. Some of the strength may be the result of the ongoing seasonal adjustments to the monthly data.  Non-seasonally adjusted sales typically pullback rather sharply in September (~-6%), as they did this year.  But this year’s pullback was smaller than normal (-3.7%).

Consumer Confidence, Inventories, Bloomberg Survey, and Fedspeak: At 9:00 a.m. CT, the University of Michigan will release the first look into consumer confidence in October.  The preliminary report is expected to show confidence edge higher but remain near its lowest levels since 2012.  Of particular interest will be consumers’ inflation expectations.  Also on the calendar today are August Business Inventories (9:00 a.m.), the October Bloomberg Survey of Economists (8:00 a.m.)., and speeches from St. Louis Fed Bank President Bullard (10:45 a.m.) and New York’s Williams (11:20 a.m.).


Bullard Assigns Even Odds to Inflation Risk: St. Louis Fed President Bullard again said tapering should begin in November and be completed by the end of March, a quicker-than-consensus timeline as described in Wednesday’s September Minutes and by most officials in more recent commentary. Bullard believes the quicker pace will give the Fed optionality to raise rates earlier next year if they need to. In his Thursday remarks, he assigned a fifty-percent chance to inflation abating and a fifty-percent chance to the stronger pressures persisting next year.

Barkin Sees Inflation Pressures Broadening: Richmond Fed President Barkin said that current inflation pressures “look more broad-based,” and “Because the risks are elevated, it seems like a sensible time to have the conversation about tapering.” He said that the new language in September’s statement that “moderation in the pace of asset purchases may soon be warranted” was the “advance warning we had promised so that no one would be surprised.” However, there is less clarity on the rate path. “We still have a lot to learn about whether recent inflation levels will be sustained and how much room we have…in the labor market until we get to maximum employment,” Barkin said, addressing the forward guidance for rate hikes. “I do think…there is going to be a return to the labor force, and that is part of why…I am willing to be a little bit more patient,” he noted.

Harker Holds Policy View Close to Consensus: Philadelphia Fed President Harker said that “it will soon be time to begin slowly and methodically – frankly, boringly” tapering the Fed’s $120 billion in asset purchases. Hiring may not be as fast as the Fed would like, but its being held back by supply-side issues that asset purchases are impotent to fix. Speaking about the Fed’s other policy tool, he noted, “I wouldn’t expect any hikes to interest rates until late next year or early 2023, unless the inflation picture changes dramatically.”


Stocks Storm Higher as Bank Earnings Help Cushion Investors’ Inflation Concerns: U.S. stocks rallied sharply Thursday on a slew of better-than-expected bank earnings and a positive jobless claims report and after September’s PPI inflation report offered some rare reprieve at a time when inflation pressures seem to be building by the day. Bank of America, Wells Fargo, Morgan Stanley, and Citigroup all posted bottom-line results that topped expectations early Thursday morning, sending their shares higher in pre-market trading. The major indexes jumped at the open and climbed steadily into the close. Ending near session highs, the Dow rose 1.6% while the Nasdaq notched a 1.7% gain. The S&P 500 also rose by 1.7%, marking its strongest daily performance since early March. While financials posted healthy gains, support across sectors was broad. Materials and tech shares led the way with gains in excess of 2% while consumer discretionary brought up the rear with a 1.0% gain. Treasury yields flattened lower despite the strong moves for stocks and new pandemic-lows for jobless claims, although the moves trailed sharper declines across Europe. Headline PPI inflation of 8.6% marked a new fast pace for the series but was marginally less firm than expected. Core prices rose just 0.1% MoM versus an expected increase of 0.4%, and the annual rate of increase cooled unexpectedly from 6.3% to 5.9%. For the day, the 2-year yield edged 0.2 bps higher to 0.36%, the 5-year yield fell 1.9 bps to 1.05%, and the 10-year yield dropped 2.6 bps lower to 1.51%. The spread between the 2- and 10-year note yields shrunk for a third straight session to 114.9 bps, the tightest since September 22.

Persistent strength for global equities on Friday paused the pullback in Treasury yields ahead of additional corporate earnings reports and an update on consumer spending on goods and at restaurants during September. Following yesterday’s rally on Wall Street, major indexes across Asia rose more than 1% and Europe’s Stoxx 600 and U.S. index futures had gained 0.4% before 7 a.m. CT. Equities have extended their weekly gains as strong bank earnings have helped cushion investors’ inflation concerns stoked by firm inflation data and rising energy prices. U.S. WTI rose above $82 per barrel early Friday to notch a new seven-year high. Rising sovereign yields failed to dent equities’ ascent. Prior to this morning’s economic releases, the 2-year yield was unchanged at 0.36% while the 10-year yield had added 2.6 bps to 1.54%. The 5-year yield had risen 1.8 bps to 1.07%. After the stronger-than-expected retail sales report, the 2-year yield was 1.5 bps higher at 1.38%, the 5-year yield was up 3.6 bps to 1.08%, and the 10-year yield had added 3.3 bps to 1.54%.

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FDA Panel Supports Moderna Booster for Older and At-Risk: An FDA advisory panel voted 19-0 Thursday to recommend booster shots of the Moderna vaccine for those 65 and older as well as anyone between 18 and 64 years old that is considered high risk because of an underlying health condition or due to their occupation. The panel recommended the booster dose be given six months after the second shot of initial vaccination. The White House said a decision on shots for younger children should come in the next few weeks and expects a Labor Department rule on vaccine mandates soon.

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