Looking straight at core retail sales (ex auto’s, gasoline and building materials) in September saw a gain of just .1% m/o/m, three tenths less than expected after a .1% decline in August. The strength in sales was seen in auto’s and building materials with sales gains up 1.1% and 1.4% respectively. Gasoline station sales were also up with the rise in prices. Sales gains were also seen in furniture, sporting goods, online retailing (.3% m/o/m gain after August drop and up 10.7% y/o/y), restaurant and bars and in the misc category which could include convenience stores and pet stores. Sales of electronics didn’t get much of a boost from the Iphone 7 as they fell .9% m/o/m and are down 3.1% y/o/y. Department store sales continue to suck wind with the 4th month in the past 5 seeing a decline. The y/o/y drop is 5.4%.
Bottom line, core sales grew by just 2.5% y/o/y, the slowest pace of gain since November 2015. For perspective, the average rate of growth over the past five years is 3.5% and the gains seen in the mid 2000’s expansion was 5.3% (thanks to using one’s house as a piggybank) and the late 1990’s that saw gains of 5.6%. Sales of auto’s have clearly topped out so the September gain is in that context. Building materials are up 6.2% and remain a source of strength as people stay in their homes longer (the sale of existing single family homes were higher in 2002 than they are today). We know the consumer is the only thing keeping the US economy out of recession and we will likely get a trimming to Q3 GDP estimates today on the core retail sales miss.
PPI grew by .3% m/o/m in September and .2% ex food and energy. Both were one tenth more than expected. The y/o/y headline gain of .7% is the most since December 2014. Most of the increase was in goods, specifically energy which rose by 2.5% m/o/m. Services inflation rose by .1% m/o/m. Bottom line, on a rate of change basis, headline inflation in both wholesale and consumer price indexes will be moving higher because of energy prices no longer falling (and rising now on a y/o/y basis) and partially offset by the recent decline in food. Services inflation ex trade rose 1.9% y/o/y and that is almost half of PPI. Treasuries didn’t respond to the 8:30am data but remain at the lows of the day with yields at the highs following weakness particularly out of the Gilt market.
The UK citizen be damned but Mark Carney said “we’re willing to tolerate a bit of overshoot in inflation over the course of the next few years in order to…cushion the blow” from a slowdown in economic growth. He’s falling for the same fallacious economic argument that Kuroda, Draghi and Yellen have. That higher inflation leads to better growth. Go ask those in Venezuela if that’s true. The consequence of higher inflation is not only bad for the UK wage earner but also for Gilt yields which are spiking again. The 10 yr yield gilt yield is up by 7 bps to 1.09%, the highest level since the day after the Brexit vote. It’s up 35 bps in the past 2 weeks. The German 10 yr yield is on track to close the week just off the highest level in a month and the US 10 yr yield is back above 1.75%. The US 30 yr bond yield is at the highest level since June. Wanting an inflation overshoot with bond yields so ridiculously low is a really bad idea.
Producer prices in China rose .1% y/o/y in September. That was the first positive print since January 2012 and compares with the estimate of down .3%. Mining and manufacturing prices led the gain due to a stabilization and lift in commodity prices but also we are now lapping thru some from tough comparisons. In order to maintain the bid to industrial metals prices, China has to continue to follow thru with taking out excess production which I believe they will in fits and starts. PPI deflation for now is essentially over in China.
Consumer prices in China in September were up by 1.9% y/o/y, up from 1.3% in August and above the estimate of up 1.6%. Food prices jumped 3.2% y/o/y but also non food prices accelerated to a 1.6% y/o/y rise, the biggest gain since June 2014.
Bottom line, I’m going to repeat again that the world’s inflation stats have recycled out the sharp declines in commodity prices where the 5 yr bear market is over. What central banks have done and will continue to do will certainly be a main factor in where global yields go from here (I continue to believe higher) but don’t ignore what is a potentially changing inflation story led by commodities on top of sticky services inflation. The UK of course will have an import inflation issue to face.
Collateral damage from the Chinese economic slowdown was clearly felt in Singapore in Q3. The Singapore economy contracted at a 4.1% q/o/q annualized pace, well worse than the estimate of up .1% and grew just .6% y/o/y vs the estimate of up 1.8%. Services (about 75% of their economy) and manufacturing (down 17.4%) were both a drag. Construction was higher. The Monetary Authority of Singapore didn’t change their FX peg against their basket but acknowledged that “growth in the Singapore economy weakened and is not expected to pick up significantly in 2017.” The Singapore Straits Index did rally though by .35% but only after 5 straight days of losses that took the index to the lowest level in a month.
Eric Rosengren, one of the three Fed dissenters, speaks today and Yellen does as well at 1:30pm. This comes a day after Patrick Harker implicitly said that why should they hike rates in November because if Trump wins, we never know what we’re going to get and it’s better to see who wins first. Irrespective of whether you think they should hike or not, it’s just another excuse added to the long list of others given over the past few years. These include China, the sequester, Brexit, Grexit, tightening of financial conditions that they cause, etc…