April retail sales at the core level taking out auto’s, gasoline and building materials were up .2% m/o/m which was .2% less than expected but March was revised up by two tenths so call it a two month push relative to forecasts. On a y/o/y basis, the level of core sales were up by 2.9% which as seen in the chart below remains at pretty mediocre growth rates.
CORE RETAIL SALES OVER THE PAST 15 YEARS
Auto sales as we know are essentially flat lining to rolling over. They were up .7% m/o/m in April but after 5 months in the past 6 of declines. The y/o/y change is basically flat at up .6%. Sales from March rose for electronics, building materials, health/personal care, sporting goods, restaurant and bars and of course for online retailing which grew by 1.4% m/o/m and 9.4% y/o/y. Certainly robust. Department store sales were up a hair for a 2nd straight month but are still down 1.2% y/o/y. The earnings and stock reactions for department stores says it all. Furniture and clothing sales fell as did food/beverage sales at the supermarket and other stores.
Bottom line, online sales continue to be great but with a mixed bag everywhere else. As for the health of the US consumer in the aggregate, sales growth is only modest as we’ve pulled forward a lot of purchases over the years, particularly in auto’s. The savings rate is at 5.9%, the most since August and consumer debt levels are high if we include student loans. We now have $1 Trillion+ debt balances in auto’s, student loans and revolving credit (mostly credit cards). As today’s data is basically in line, I don’t expect a revision to Q2 GDP estimates.
Headline CPI for April was higher by .2% as expected and the core rate moved up by .1% which was one tenth less than expected. The y/o/y gains were 2.2% and 1.9% respectively. The headline was goosed by energy while food price gains were modest. While rent growth in some major cities is slowing, it didn’t show up in today’s hard data or maybe was offset elsewhere as Rent of Primary Residence rose another .3% m/o/m and was up 3.8% y/o/y. Owners Equivalent Rent, a faux measure of rent and I’ll refer to as soft data because it’s not measuring actual rent like the one I just mentioned, was up .2% m/o/m and slowed to 3.4% y/o/y. As this makes up 25% of CPI, it was a factor in the core miss. Services inflation ex energy continued to moderate with a .1% rise m/o/m and 2.7% y/o/y after a few years of 3%+ gains. Medical care also kept a lid on the core as prices here fell .2% m/o/m and slowed to a 3% rise y/o/y. As we know, used car prices were weak with a .5% m/o/m drop and now a 4.6% y/o/y fall. This is great for someone looking to a buy a car with cash but is quite a challenge for loan officers, new car dealers, those wanting to lease, those wanting to buy on credit and of course the car manufacturers. New car prices fell .2% m/o/m but were up .4% y/o/y. Apparel prices fell m/o/m by .3% but were up a modest .5% y/o/y. There was a huge 7% m/o/m plunge in wireless phone services in March and they fell another 1.7% in April.
Bottom line, we have another month of goods deflation (down .6% y/o/y) and services inflation up 2.7% y/o/y but as stated the latter definitely is slowing down. The wild card from here will be whether 1)commodity prices are just taking a breather or we’ve seen the end of the rally (I think the former because of supply cuts), 2) the oncoming supply of multi family homes overwhelms demand (it’s apparent in NY, SF and Miami but less so elsewhere), 3)the overhaul of Obamacare gets passed and what its impact is on medical care costs which makes up almost 9% of CPI and 4)whether the tightening labor market eventually leads to an acceleration in those getting raises and which companies respond with higher consumer prices to protect their profit margins. If Trump wants to ‘prime the pump’ with tax cuts as he said in his new interview in The Economist, expect #4 as the pool of available workers continues to shrink. Also, expect car prices to continue to fall.
On the mediocre retail sales number and core CPI miss, US treasuries are rallying with the 10 yr yield back down to 2.35% from 2.40% before hand. The US dollar is at the low of the morning and gold is at the high in response. What does this mean for the Fed? Likely nothing as they are reacting to lagging indicators which is why they are stepping up their rate hike cycle in the 9th year of the expansion instead of in the middle innings which would have gotten them done by the 9th.
Whack a mole is the best way of describing the credit data out of China for April. Bang on the shadow lending side and up comes the official banking sector. Chinese credit growth continued its sharp pace of gains in April. Aggregate financing grew by 1.39T yuan, 240b more than expected with bank loans making up 1.1T of that which was 285b yuan more than anticipated. This of course means that shadow lending actually did come in a bit below expectations but more than offset by straight lending from banks. Smoothing out the lumpiness of the monthly figures has credit growth up by 11% y/o/y in the first 4 months of the year which compares to nominal GDP growth in Q1 of around 11.5%. Money supply growth did however moderate to 10.5% growth y/o/y, the slowest since July 2016 and below the estimate of up 10.8%. As this makes up a lot of deposits where growth slowed, we have to assume the growth source of lending is from wholesale funding which is not as stable. Whack a mole. The government’s attempt to slow credit growth is either a charade or will take time to filter its way thru. This data came out after the Shanghai close which closed up by .7% but finished the week lower for a 5th straight week at the same time the H share index closed up for the 5th straight day. Whack a mole. Chinese bonds and interbank rates were little changed and the yuan is flattish.
The Hong Kong economy had a good Q1 as it grew by .7% q/o/q and 4.3% y/o/y vs the estimate of up .2% and 3.7% respectively. Consumer spending and exports helped. The property market is also out of control and the Hong Kong Monetary Authority today cut the loan to value ratio that a lender can finance a project on and that new requirement starts on June 1st. The bubble was certainly financed by the easy interest rate policy of the Fed that the HKMA imports via the peg. Keep a watch on this property market has they feel the impact of rising US short rates. This news came out after the Hang Seng close. Between Hong Kong, Canada, Australia, Sweden and others after the US (and Spain and Ireland) experience of the mid 2000’s we keep replaying this game of artificially low rates and the development of property bubbles because central banks don’t classify high asset prices as inflation. They’ve boxed in their definition of inflation to only consumer prices which is nonsense.
The German economy in Q1 grew about as expected by .6% q/o/q and 2.9% y/o/y. Construction (property market pick up as German’s reach for any yield they can get) and equipment spending improved while consumer spending was up a touch. Exports were higher. The DAX isn’t doing much in response as this is old news while the euro is up slightly and German yields are a touch lower. I forgot to include this quote in yesterday’s note when I mentioned the Dutch heckling of Mario Draghi: an MP said to Draghi “You look remarkably calm for someone who issues 2.5 trillion euros out of thin air, especially when your chief economist says there is no Plan B.”
We also saw industrial production for March in the euro area which was light as they fell .1% vs the estimate of up .3% but that was partially offset by a 2 tenths upward revision to February. Again, old news and was driven by a drop in energy production. The other categories of consumer and capital goods were up m/o/m.