The Market Today

Retail Sales Beat Expectations in October as Consumers Keep Spending


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Retail Sales Beat Expectations in October: Retail sales were stronger than expected in October. Total sales (expected +1.4%) and sales excluding autos (expected +1.0%) both rose 1.7% to start the third quarter. When a 3.9% increase in gasoline spending in also removed, the 1.4% increase doubled the expected 0.7% gain. Activity in the important control group category, which is the direct feed into GDP calculations, rose 1.6% compared with an expected 0.9% gain. Revisions to the prior two months’ data were mixed but a small net negative at the control group level. Sales at health stores and of apparel both dipped just over 0.5%. However, the strength was broad across the remaining goods-focused categories, led by a 4.0% jump at online retailers. Sales at miscellaneous retailers and of building materials both rose 2.8%. Purchases of autos and home furnishings rose 1.8% and 1.7%, respectively. However, despite the stronger-than-expected results some questions still remain. The retail sales data is nominal (not adjusted for inflation) and would reflect rising prices (CPI goods inflation rose 1.5% MoM in October) as well as real spending growth. Grocery sales rose 1.1% in October and are up 3.7% over the past three months, the fastest three-month pace on record excluding volatility early in the pandemic. A shift from spending on goods to services is one factor the Fed believes will help inflation pressures moderate. The retail sales data primarily track spending on goods. The lone services category, spending at restaurants, was flat and has risen just 0.5% since July, reflecting little recovery since Delta disrupted activity. While those factors add some uncertainty, the retail sales data, when paired with stronger-than-expected retail earnings earlier this morning (more below), show consumers continued to spending heading into the fourth quarter and the holiday season.

Import and Export Prices Rise More than Expected: Import prices rose 1.2% MoM in October and 0.5% when stronger higher petroleum prices are adjusted out, both faster than expected increases of 1.0% and 0.3%. Export prices jumped 1.5% on the month and 18.0% compared with a year ago, outpacing expected gains of 1.0% and 16.3%. In addition, prior month price increases were notched higher in revisions.

Busy Day of Economic Data: Later today, the Federal Reserve will release industrial production data for October that will include an update on manufacturing trends across the U.S. Total industrial production and the manufacturing component are both expected to rise 0.9% for the month after declines of 1.3% and 0.7% in September. Another sizeable drop for auto activity led a broader softness for the sector in September. The NAHB will release its homebuilder confidence report which is expected to show sentiment was steady at 80 in November after two months of recovery from a summer lull. Fed Presidents Barkin, Bostic, and George will speak at an event on racism and the economy and President Daly will give a speech later this afternoon. Daly previously described the October CPI report as “eye-popping” but was persistent in her support of patient policy.

 

OTHER ECONOMIC NEWS

Former Fed Officials Speculate Fed May Be Forced to Hike Faster and Further than Expected To Tamp Down Inflation: In a Bloomberg opinion piece published on Monday, former New York Fed President Bill Dudley said the Fed is likely to stick to its plans to be patient and hope that supply issues clear up and help slow down inflation, despite growing evidence that they need to be tightening policy. In a subsequent interview on Bloomberg, Dudley said, “They will probably start [hiking] after June or a little bit later, and go to a higher rate than people think,” potentially to a peak of “3% to 4%.” He did admit that, “The crystal ball is cloudy as you get further out.”

Jeffrey Lacker, former head of the Richmond Federal Reserve Bank, said later, “It seems to be plausible we get to 3.5% or 4% and in addition that we push the economy into a recession.” Lacker said the Fed needs “to pivot, recalibrate pretty rapidly. They need to accelerate the taper, get rate increases started earlier next year, in the first half, and they’re going to need some good luck.”


TRADING ACTVITY

Global Rates Backed Up Monday As Inflation Expectations Continued to Climb and Central Bank Officials Talked About Tightening: Treasury yields added to last week’s rise that began in earnest after a hotter-than-expected CPI inflation report for October. Monday’s yield increase began shortly after the New York Fed’s manufacturing index topped expectations and a couple of former Fed officials posited publicly that the U.S. central bank may be forced to hike sooner and more sharply than expected (more above). Additionally, the head of Canada’s central bank said “we are getting closer” to rate hikes while the boss of the Bank of England said he is “very uneasy about the inflation situation.” Sovereign yields had been quiet in overnight trading in Asia and Europe but rose during the U.S. session. Longer Treasury yields rose more sharply than shorter yields, steepening the tips of the curve. The 2-year yield rose 0.4 bps to 0.52%, the highest close since March 2020. The 5-year yield added 3.1 bps to 1.25%, its highest close since February 2020. The 10-year yield jumped 5.3 bps to 1.62%, its highest close since October 25. The spread between the 2-year and 10-year Treasury yields widened to 109.5 bps, the most slope since the Fed’s early-November meeting. Stocks gave up early gains, leaving all three major indices down by less than 0.1% on the day.

U.S. equity index futures and Treasury yields were both little changed early Tuesday as investors digested corporate earnings from major U.S. retailers as they awaited the Census Bureau’s update on retail spending for October. Walmart reported third-quarter financial results that topped analysts’ expectations across the board. The company’s revenue, earnings, and same-store sales all rose more than anticipated, leading executives to raise guidance for the full year. The company did note supply-chain issues and rising labor costs impacted margins. Results from Home Depot also outpaced investor expectations. Same-store sales gained more than expected and net sales and earnings per share were stronger than the most optimistic estimate. Shares of both companies were up more than 1% earlier in pre-market trading. Treasury yields were mixed and little changed prior to the release of October’s retail sales data. The 2-year yield was 0.4 bps higher at 0.52% while the 10-year yield had dipped 0.5 bps to 1.61%. After the better-than-expected retail sales report, the 2-year yield rose 2.0 bps to 0.54%, a new high since March 2020, and the 10-year yield was 1.0 bp higher at 1.63%.


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