The Market Today
Retail Sales Remain Elevated in April; Fed Officials Hold the Line
by Craig Dismuke, Dudley Carter
Retail Sales Remain Elevated in April but the March Basis Is Very High: Headline retail sales were unchanged in April as a pullback in activity across most categories from March’s stimulus-driven spike was offset by continued strength in auto and restaurant sales. Auto sales increased another 2.9% after rising 15% in the March report. Sales at food services and drinking places also gained 3.0% after a 13% increase in March while electronics and appliances sales continued 1.2% higher in April. Gasoline sales actually pulled back 1.1% in April lest the headline figure would have been positive. Building material sales dropped 0.4% after a 12% gain in March. Clothing sales saw the biggest decline from March to April, down 5.1%. Cumulatively, core sales excluding autos and gasoline fell 0.8% but remained at an elevated level. Non-seasonally adjusted headline sales pulled back 2.1% during the month, better than typical (5-year pre-virus average) 2.8% decline in April. However, that is coming off a March level that was up 28.4% MoM NSA versus a typical March gain (5-year pre-virus average) of 14.9%. While consumption is remaining strong in April, this data highlight the difficulty in growing on a quarter-over-quarter basis when the growth is driven by one-time stimulus effects.
Busy Day of Data – Survey of Economists, Industrial Production, Consumer Confidence: The Bloomberg Survey of Economists is scheduled for release at 8:00 a.m. CT. April’s report on industrial production (8:15 a.m.) is expected to show manufacturing output recover 0.3% MoM. The preliminary May report on consumer confidence (University of Michigan, 9:00 a.m.) is expected to improve modestly. Consumer inflation expectations, currently at their highest level since 2012, are likely to becoming increasingly important. They are expected to inch up from 3.4% to 3.5%. Dallas Fed Bank President Kaplan will speak at 12:00 noon.
24 HOURS OF MARKET ACTIVITY
Markets Partially Unwind Wednesday’s Post-CPI Moves After Upbeat Jobless Claims Data, Despite Another Inflation-Stirring Report
U.S. equities recovered a portion of Wednesday’s 2.1% slump which began shortly after a surprisingly hot CPI report raised fears about faster inflation. The S&P 500 recovered 1.2% Thursday following another upbeat jobless claims report and despite a second release, April’s producer price inflation report, showing firmer-than-expected price pressures. Financials and industrials, which tend to outperform in improving economic times, led 10 of the index’s 11 sectors higher. Energy companies fell 1.4% as crude prices dropped more than 3% amid broad weakness across the commodities complex. A number of agricultural commodities saw sizeable price declines due to the cracked I-40 bridge in Memphis bringing barge traffic on the Mississippi to a halt as well as a disappointing crop report. Treasury yields also unwound around half of the prior day’s increase; the 10-year yield dipped 3.8 bps lower to 1.66%. Longer yields lagged larger declines in the belly of the curve after the New York Fed announced “technical adjustments” to monthly Treasury purchases.
U.S. equity futures have extended their recovery from Wednesday’s inflation-induced plunge into Friday and Treasury yields continued to unwind the coincident spike ahead of April’s retail sales report. The gains for futures, which had pushed the S&P 500 up 0.7% at 7 a.m. CT, tacked on to solid gains across Asia and Europe to lift global shares after a couple of days of declines. The 10-year Treasury yield was down 2.2 bps to below 1.64% immediately before the retail sales update, holding just above Wednesday’s pre-CPI level. Market levels were hardly changed after April’s retail sales results were reported.
Fifteen States to Cut Off Pandemic Unemployment Supplements Early: According to a report published by CNBC, “By Thursday morning, at least 15 states, all led by Republican governors, had announced they would end their participation in pandemic-era unemployment programs.” According to the report, the states include Alabama, Arizona, Arkansas, Idaho, Iowa, Georgia, Mississippi, Missouri, Montana, North Dakota, South Carolina, South Dakota, Tennessee, Utah, and Wyoming. The reports states, “As a result, workers will no longer get a $300 weekly supplement to benefits. Those ineligible for state-level benefits — like the long-term unemployed, self-employed and gig workers — will lose aid entirely.” The states are reportedly eliminating the provisions “as early as June 12 and others as late as July 10.” According to the most recent weekly jobless claims data, there are 915k persons receiving PUA or PEUC assistance in those 15 states, or 1.6% of their combined populations. There are 11.3mm persons receiving PUA or PEUC assistance in the other 35 states representing 4.2% of their combined populations.
Fed Adjusts Allocations of Monthly Treasury Purchases Because of Restart of 20-Year Note Issuance: The New York Fed announced yesterday that, beginning today, it would make “technical adjustments” to the allocations of its monthly Treasury purchases to keep those buys “roughly proportional” to outstanding Treasury securities. The adjustment will increase purchases of securities with maturities between 7 and 30 years by 3% and lead to purchases of “the shortest” sectors and TIPS to “decrease modestly.” An official with the regional bank indicated several weeks ago this change was in the works after the Treasury resumed issuance of a 20-year note in 2020.
WSJ on Chip Shortage, Wildly Unusual Car Market: “Americans are shopping for cars in near-record numbers, but the world’s computer-chip shortage has left dealers with the fewest offerings in decades. The market mismatch is driving up prices, and many buyers expecting to drive new cars off the lot have to wait weeks or months for their vehicles to arrive. Some showroom models sell for thousands of dollars over the sticker price. …Auto makers have been forced to cut production of more than 1.2 million vehicles in North America because they can’t get enough chips that are used for everything from safety systems to brakes and engines, …Dealers had fewer than 2 million vehicles on the ground or en route to stores at the end of April, roughly half the normal number and the lowest level in more than three decades.”
MOST FED OFFICIALS EXPECT TOO-STRONG INFLATION TO BE TRANSITORY
Richmond Fed President Barkin noted that “spending has come back faster than employment” and expects a “really strong spring and summer” for economic activity. Base effects and supply constraints facing the release of pent-up demand were key factors driving recent inflation data. Discussing his inflation-related conversations with businesses in his District, Barkin disclosed, “I still don’t hear their medium to long term expectations of inflation changing.”
Fed Governor Waller, the most recent addition to the Board of Governors, said the economy is “going gangbusters,” despite an unexpectedly weak jobs report, and that “the unexpectedly high CPI inflation report” was the result of “temporary” factors. He would become concerned with 4% inflation prints “month in, month out.” He added that “an accommodative monetary policy continues to have an important role to play in supporting the recovery.” “Now is the time we need to be patient, steely-eyed central bankers,” he said, “and not be head-faked by temporary data surprises.”
St. Louis Fed President Bullard said in a speech Thursday that downside risks to the economy have declined, the job market should really heat up this summer, and is expecting inflation to be “meaningfully above 2% over the forecast horizon.” However, he believes monetary policy is in a “good position” and should be held steady while the pandemic is still ongoing. Addressing a common topic of disagreement, Bullard said enhanced unemployment benefits are, on the margin, likely a negative for labor supply.
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
CDC Updates Mask Guidance; Infrastructure Talks Continue: The CDC was in the headlines on Thursday after announcing that fully vaccinated individuals no longer needed to wear masks in most environments or socially distance when gathered with others that are also fully vaccinated. U.S. infrastructure was also back in the news following a meeting between President Biden and several top Republicans in Congress. The President said he was prepared to compromise to pass an infrastructure package and a top Republican Senator said talks were moving in the right direction. Wide differences, however, appear to remain with Republicans saying they are uncomfortable with the scope of the White House proposal and unwilling to walk back tax cuts passed in 2017.