Retail sales remain mediocre / CPI moderates / Curve flattens further

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United States

Core retail sales were flat m/o/m in May which was 3 tenths below expectations but April was revised up by 4 tenths so we can call it a push relative to the estimates. Sales ex auto’s and gasoline were also unchanged m/o/m vs the estimate too of up 3 tenths but April was revised up by two tenths. Not surprisingly, auto sales fell for the 4^th month in the past 5. The auto sector recession has begun. The sales of building materials were unchanged. Sales for electronics were down by almost 3% m/o/m and is lower by .7% y/o/y. Sales also dropped for sporting goods, department stores (shocking I know) and in the misc category. As seen with Cheesecake Factory’s announcement yesterday, sales at restaurant/bars fell for the 3 straight month. Clothing and furniture sales were up a touch. Online retailing continues to be robust as sales here grew by .8% m/o/m and 12.4% y/o/y.

Bottom line, core retail sales growth remains mediocre as measured by the 2.9% y/o/y gain which is back below the 5 year average of 3.3% and well below the 5%+ pace of gains seen in the prior two expansions. I think at this point we all know the reasons as consumers have raised their savings rate, a growing portion of household income is going towards healthcare services, household debt is back to matching record highs, many millennials are dealing with $1.2T of student debt and little savings, retiring baby boomers just don’t spend as much, wage gains are modest, auto delinquencies are rising and the Fed’s wealth effect concept is a bunch of BS.

In case you missed this comment yesterday at a conference from Gordon Smith who heads JPM’s consumer businesses, Reuters reported that he said “US credit card losses are likely to rise at JP Morgan Chase and across the industry…Smith said they are being ‘surgical’ in determining where to tighten credit standards but he added that lenders industry-wide ought to be leaning toward stricter credit card lending standards rather than looser ones.”

CORE RETAIL SALES y/o/y change SINCE 2005

Both headline and core CPI missed expectations by one tenth with -.1% and .1% m/o/m changes. The y/o/y gain for the headline print was 1.9% and 1.7% at the core. Keeping a lid on the core was the 2.6% y/o/y increase in services inflation ex energy which is a continued slowdown from the persistent 3%+ gains we saw for a few years running. Rent increases remain robust though as we saw another .3% m/o/m rise in the Rent of Primary Residence (7.8% of CPI) and a 3.8% y/o/y gain. Owners equivalent rent (24.5% of CPI), a faux measure of inflation was up by .2% m/o/m and 3.3% y/o/y. Thus, if CPI was measuring the rents people actually pay out of pocket, the inflation figures would be higher. Medical care costs were flat m/o/m and slowed to 2.7% y/o/y and that was a key factor in the service inflation moderation. Energy prices were down 2.7% m/o/m while still up 5.4% y/o/y. Food prices rose .2% and now have risen by either .2-.3% for 4 months running. I keep highlighting the recent rise in food prices. While services inflation is still rising but have moderated in its pace, goods prices remain in their persistent deflation as they were down by .3% m/o/m driven by new and used car prices. Used car prices are down 4.3% y/o/y for reasons we all should know by now. Notable price declines were also seen in household related items.

Bottom line, the slowdown in services inflation on a rate of change basis now joins the end of the base effects from the energy driven commodity jump and thus is leading to an overall moderation in the rise in consumer prices. Rate hike odds for the September meeting have fallen to just 28% in response from 34% just prior while the 2s/10s spread has narrowed to just 83 bps, 8 from the lowest level since November 2007. Noteworthy is the continued fall in used car prices which has major implications for the auto sector which, as stated, is now in a recession.