United States
Retail sales in June declined across the key components (headline, ex auto’s, ex auto and gasoline and the control group). Looking directly at the control group which also takes out building materials saw a sales decline of .1% instead of rising by .4% as expected and expect a cut to Q2 GDP estimates as a result. This m/o/m decline comes after no growth in May. The y/o/y sales gain in this core category was up just 2.4% which matches the worst read since January 2014.
Within the report, sales of motor vehicles/parts rose .1% m/o/m and are up 4.3% y/o/y but we expect this trend to continue to slow. Sales also rose in furniture, electronics but each by just .1% m/o/m. Sales at department stores again fell and are lower by 4.2% y/o/y. Sporting goods were weak with a .6% m/o/m and 7.7% drop. Clothing sales fell for a 2nd month but are up a modest 1% vs last year. Restaurant/bar sales continue to slow as they fell .6% m/o/m and are up just 3% y/o/y. Online sales grew by .4% m/o/m and 10% y/o/y and of course continues to gain share.
Bottom line, sales ex auto’s, gasoline and building materials have basically flat lined for 4 straight months. See chart. We can all speculate why and what is going on but the data speaks for itself. Hopefully of course this is just a temporary lull but the economy is running with a 1 handle on its GDP growth rate at the same time the Fed is tightening monetary policy.
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Headline CPI was flat m/o/m and up .1% at the core, both one tenth below the estimate. Due to rounding though, the y/o/y core rate of 1.7% was as expected while headline CPI was up by 1.6%. Energy prices fell m/o/m for the 4th month in the past 5 while food prices were flat. As stated before, I expect food prices to start moving higher in the short term. Services ex energy prices were up .2% m/o/m and 2.5% y/o/y. The two key components within this, rents and healthcare saw a pickup in pricing. Owners equivalent rent, which understates actually rent growth, was up by .3% m/o/m and 3.2% y/o/y. Actual Rent of Primary Residence which bizarrely is weighted less than OER (8% vs 25%) was up by .3% m/o/m and 3.9% y/o/y. Out of pocket medical expenses were up by .4% m/o/m and 2.7% y/o/y. Used car prices fell .7% m/o/m and 4.3% y/o/y and of course is the new worry for the new car market and the $1T auto loan market. New car prices fell .3% m/o/m and were flat y/o/y. We keep hearing Fed members, especially Yellen this week, talk about falling wireless prices as a weight on consumer prices. Well, they dropped another .8% m/o/m and are down 13.2% y/o/y but make up only a very small portion of this index.
Bottom line, the inflation story is the same, we have services inflation and goods deflation with the former slowing to the lowest read since May 2015 which has thus moderated the overall prints. Higher rent and medical costs (likely the two biggest cost of living expenses for many families) will continue to take up a disproportionate share of consumer spend and may explain part of the weakness in retail sales. As for what this all means for the Fed, we certainly have them backing off somewhat from hiking rates in September but instead won’t stop them from initiating QT. Again, either way we are most likely getting another form of tightening. Voting member Robert Kaplan today on Bloomberg said his contacts tell him the labor market continues to tighten and wages are going higher and that is why they still will tighten further from here. Treasuries are focused on the data however and not Kaplan’s comments. The 2 yr yield was at 1.35% before the data and is down 2 bps since. The 10 yr yield is down by 5 bps and the 2s/10s spread is narrowing by 2 bps. The dollar index is breaking to the lowest level since September 2016 and gold is up 1%.