The Market Today

Retail Sales Slip in May But Broader View Shows Solid Spending Trend Continues

by Craig Dismuke, Dudley Carter


Retail Sales Slip More than Expected in May But Broader View Shows Solid Spending Trend Continues: Retail sales were weaker than forecasted in May but prior-months’ results were revised up, leaving overall spending over the last three months at a better level than was expected. Total sales slipped 1.3% last month (expected -0.8%) but April’s flat comparison to March was revised to a 0.9% gain, even more encouraging considering March’s stimulus-driven surge was also revised up from 10.7% to 11.3%. On a non-seasonally adjusted basis, total retail sales actually rose 3.0% to $644 billion, a record high. Away from the headline tally, the dynamic of current-month percentage-change disappointments being more than offset by positive prior revisions played out across the other various groupings; sale excluding autos fell 0.7%; sales excluding autos and gasoline fell 0.8%; and control group sales, which also remove building materials and foods services dropped 0.7%. Looking through the details, the month-over-month change for activity was volatile across industries. Several categories saw large declines, including autos (-3.7%), building materials (-5.9%), general merchandise stores (-3.3%), and miscellaneous store retailers (-5.0%). However, other categories saw solid gains, including food and beverage (+1.0%), health and personal care (+1.8%), apparel (+3.0%), and restaurants and bars (+1.8%).

The bottom line is that seasonally adjusted sales cooled a bit more than expected in May on a mix of changes across categories. However, the non-seasonally adjusted sales showed activity continued to rise in unadjusted terms from a higher-than-expected level, considering those positive revisions for March and April. Breaking the figures into quarters, total sales for the second quarter are tracking at more than a 28% gain from a really strong first quarter result, indicating consumer spending continues its rebound, albeit unevenly across months and sectors. Also important to remember, the retail sales report is goods-focused, only capturing services at restaurants and bars. Therefore, trends in the retail sales data moving forward may not fully capture economic momentum, considering the re-opening rebound is expected to disproportionately benefit the services sectors the report doesn’t capture.

Firmer-than-Expected Producer Price Inflation to Add to the Inflation Debate: Continuing a recent theme for most inflation indicators, pricing increases in the producer pipeline rose more than expected in May. The PPI report showed headline prices rose 0.8%, faster than the 0.5% gain expected. Core prices, which strip out food and energy, rose 0.7% from April, also topping an expected 0.5% gain. On an annual basis, these measures moved up from 6.2% to 6.6% and from 4.1% to 4.8%, respectively. The only category to see a monthly price decline was airfares, which fell 1.3% after a 7.2% surge in April. Most other categories were broadly firmer. The report will add to the debate that has heated up over the last couple of months about whether firmer inflation will indeed be transitory as the Fed and many other economists believe. The PPI data reflect the rising prices businesses say they are feeling from suppliers, a pressure that could translate into firmer consumer inflation if businesses choose to, and are able, to pass the higher costs along.

Empire Manufacturing Cools But Indicates Better Days Ahead: The New York Fed’s Empire Manufacturing Index fell more than expected in June, from 24.3 to 17.4, but remained at a solid level in an historical context. Among other changes, the weaker current conditions reflect slower new orders and shipments and a softer reading on employment. Encouragingly, however, the outlook for six months ahead was much brighter and built on solid gains for these same categories.

Second Wave of Tuesday Data: At 8:15 a.m. CT, the Federal Reserve Board will release its Industrial Production report for May. One of the key focuses will be on trends in manufacturing activity last month, with particular interest in auto-related production. The ongoing chip shortage has upended the auto industry amid surprisingly strong demand during the pandemic, and been one of the forces behind unusually strong inflation readings in recent months. At 9 a.m. CT, the NAHB will report its latest reading on home builder confidence, a measure that has stalled out in recent months after rising to an all-time high last November in records back to 1985. While still elevated compared with pre-pandemic levels and despite mortgage rates remaining relatively low, most housing market indicators have cooled recently amid low inventories and rapidly rising prices.



Stocks Set Another Record To Start the Week as Treasury Yields Recoiled from Three-Month Lows: A lack of a specific catalyst for Monday’s move up in yield lent support to those pointing to a technical bounce from last Friday’s three-month low heading into today’s heavy slate of economic data and 20-Year Treasury auction and the Fed’s policy announcement on Wednesday afternoon. The 10-year Treasury yield fell sharply last week despite the fastest core CPI print since 1992, as downside momentum picked up after a break below 1.54%. After dropping 10.2 bps on the week to close Friday at 1.453%, its lowest level since March 2, the 10-year yield climbed back 4.2 bps to end Monday just below 1.50%. After spending nearly the entire day in negative territory, the S&P 500 ramped higher in the final 30 minutes of trading to close 0.2% higher and post its third consecutive record-high close. The Nasdaq also powered 0.7% higher, reaching its first new record close since April 26, while the Dow slipped 0.3%.

Early-morning futures trading pointed to the major indexes holding near record levels at the open and Treasury yields were essentially flat at 7 a.m. CT. Globally, equities had traded unevenly so far on Tuesday and major sovereign yield curves were little different on the day. Just before the 7:30 a.m. CT round of data were announced, S&P 500 futures were up 0.1% and the 10-year Treasury yield was 0.8 bps lower at 1.49%.

U.S., EU Reach a Deal to Suspend Tariffs Tied to Airline Subsidies:
Leaders from the U.S. and EU announced they had reached a deal to suspend tariffs related to government subsidies to Boeing and Airbus. “Today’s announcement resolves a long standing trade irritant in the U.S.-EU relationship,” the U.S. Trade Representative said, adding, “We have also with the EU agreed to clear statements on acceptable support for large civil aircraft producers and a cooperative process to address that support between our two parties.” President of the European Commission said, “This really opens a new chapter in our relationship because we move from litigation to cooperation on aircraft.” Tariffs have been gradually added to around $11.5 billion of goods over the last couple of years as part of the dispute.

CORONAVIRUS UPDATE  Vining Sparks Coronavirus Chartbook

U.K. Extends Lockdown by One Month: Monday’s biggest virus-related news came from the U.K. after Prime Minister Johnson announced an extension of the current lockdown measures until July 19. The measures had been set to expire next Monday. Top U.K. medical officials said the “assessment of risk has fundamentally shifted” in recent weeks amid rising case counts they attributed primarily to the emergence of the Delta variant from India. They were concerned England would “run into trouble” if restrictions were loosened as planned. On a brighter note, a U.K. study found the Pfizer (96%) and AstraZeneca (92%) shots to be highly effective at preventing severe disease from the Indian variant. In other vaccine headlines, Novavax said a large trial showed its vaccine was 100% effective at preventing severe disease.

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