Retail sales in July were weaker than expected. Sales ex auto’s and gasoline fell .1% instead of rising by 3 tenths as expected. Revisions netted out to no change in the two prior months. Also taking out building materials to get to the so called ‘control group’ saw sales flat m/o/m vs the estimate of up .3%. Vehicle sales rebounded by 1.1% m/o/m but are now down by .4% y/o/y. Furniture sales rose too m/o/m while the real strength remained for online retailing where sales rose 1.3% m/o/m and 10.1% y/o/y. Sales declines m/o/m were seen everywhere else, in electronics (down 4.2% y/o/y), building materials (down 1.6% y/o/y), food/beverages (up 1.2% y/o/y), clothing (down 1.3% y/o/y), sporting goods (up 1.9% y/o/y), department stores (down 4.2% y/o/y) and restaurant/bars (but still up 6.1% y/o/y). With the decline in gasoline prices, gas station sales fell 2.7% m/o/m and 11.4% y/o/y.
Bottom line, core retail sales were not only flat m/o/m but the 3.3% y/o/y rise is the slowest in 4 months. This compares with the 5 year average of 3.6%. Going further back for perspective, core sales ran at a 5% rate in the mid 2000’s recovery and 5.5% in the late 1990’s. We entered the week with the consumer being a key focus and we end the week with very mixed signals. Department store stocks have crushed the shorts with better than expected expense management but headline comps that are still soft and y/o/y sales declines. Some retailers talked about promotional headwinds, reduced tourist spending, and macroeconomic headwinds but others dealt with it better than others. For restaurants, fast food/fast casual are a mixed bag too.
Thus, with the consumer being the last firewall between economic expansion and contraction in the US, we’re now seeing some uneven behavior. Income growth is still mediocre notwithstanding our hopes of acceleration and maybe that is why the savings rate has fallen by 9 tenths over the past 3 months to June and revolving credit outstanding (mostly credit cards) is up by almost 10% at annualized rate as of June. It’s certainly better to have income growth drive spending rather than a drawdown on savings an increase in debt.
The UoM preliminary consumer confidence index for August was 90.4, about 1 pt below the estimate of 91.5 but up a touch from 90 in July. The internal components were mixed as Current Conditions fell 2.9 pts to a 5 month low but Expectations rebounded by 2.5 pts after falling by 4.6 pts in July. One year inflation expectations moderated by two tenths to 2.5% likely in response to the drop in gasoline prices as that is a high profile price point that people see every day. The main disappointment within the index was Net Income which fell 2 pts to the lowest level since December. The offset was employment expectations improved to a 3 month high. As for spending considerations, those that plan to buy a car fell to match the lowest since December. That squares with what we heard from Ford a few weeks ago. Those that think it’s a good time to buy a major household item fell 6 pts to a 5 month low. Housing intentions were mixed as those that think it’s a good time to buy rose to the highest since January but those that think it’s a good time to sell a house rose to the highest since 2006. Remember then?
Bottom line, the 90.4 print compares with the ytd average of 91.5 and 92.9 in December. Thus, confidence has been essentially flat lining over the past few years but still at pretty good levels. The high in this cycle was in January 2015. What explains the recent stagnation? I’ll say, lackluster income growth, an ever rising cost of living for many (due to healthcare, rent, property taxes, and many other services overwhelming cheaper smart phones, gasoline and clothing) and too much debt still (especially for younger people) where all of the above is being fully expressed in the country’s election and primary choices. Holding confidence together on the other hand is good job growth, full employment for those looking, wage growth for skilled workers, and record highs in stocks.
Business inventories in June rose .2% m/o/m, one tenth more than expected and with a 1.2% sales gain, the inventory to sales ratio fell to 1.39 from 1.40. That is the lowest since November but still remains elevated and not far from the highest since 2009. Of note, retail inventories of auto’s/parts are up 10.9% y/o/y and the I/S ratio rose to 2.28 from 2.27, the 2nd highest level since January ’14. Bottom line, Q2 GDP estimates may get revised up a hair based on this number as we know there was outright destocking seen in inventories within the first Q2 GDP report. Also expect Q3 GDP estimates to get revised down after retail sales.
As for what today’s economic data means for markets, the most noteworthy move is in US Treasuries on the weaker than expected retail sales report. The US 2 yr note yield touched 75 bps this morning pre release and now is at 70 bps. The 10 yr touched 1.58% yesterday and is at 1.50% right now. The US dollar is at a 1 ½ week low. Stocks don’t care (brainwashed by low rates) even though we keep discounting lower earnings at this lower discount rate.
Elsewhere, the dangers of our modern day monetary excesses has just arrived in a new place and IF (I emphasize IF) it spreads, Mario Draghi and the ECB will have an uprising at its doors. Last night, Bloomberg news reported that “this week, a German cooperative savings bank in the Bavarian village of Gmund am Tegernsee, population 5,767, said it’ll start charging retail customers to hold their cash. From September, for savings in excess of 100,000 euros, the community’s Raiffeisen bank will take back .4%.” That is the same level as the ECB’s negative deposit rate. This bank has been charging business clients that same penalty and a board member of the bank said “so why should it be any different for private individuals with big balances?” I’ll take a bottom line from the story: “in principle the ECB’s negative deposit rate was meant to encourage spending and investment in the euro area’s sluggish economy, not to tax thrifty Bavarians.” I’ve called NIRP a Weapon of Mass Confiscation and this is another perfect example. NIRP is the dumbest monetary initiative the world has ever seen. Bottom line, monetary policy is damaging global growth, not facilitating it and we are seeing more and more evidence of policy backfiring.
Loan growth in China slowed dramatically in July. Aggregate financing totaled 488b yuan, less than half the estimate of 1T and down from 1.63T in June. It’s the lowest pace of increase since July 2014 and down 34% y/o/y. Of this total, bank loans made up 464b. Thus, the credit extension on the shadow side was essentially near zero. M2 money supply growth also slowed to a growth rate of 10.2% y/o/y vs the estimate of 11%, down from 11.8% in June and the slowest rise since May 2015. Bottom line, China has a massive credit bubble on its hands so I’m happy to see the credit slowdown but this will be a painful adjustment and one that has to occur nonetheless.
The other Chinese economic data also missed expectations. Industrial production in July rose 6% y/o/y, two tenths less than expected. Retail sales were up by 10.2% y/o/y, three tenths below the forecast. Fixed asset investment ytd y/o/y grew by 8.1% vs expectations of up 8.9%. Notwithstanding further signs of a Chinese slowdown, the response in their stock market was the same globally, higher. The Shanghai comp was up by 1.6% and the H share index rallied by 1.4%. The yuan though is lower and copper is down by 1.6% to just off the lowest level in a month.
Hong Kong’s economy in Q2 benefited from the stimulus driven stabilization in China as it grew 1.7% y/o/y, above the estimate of up .9%. On a q/o/q basis GDP was up by 1.6% after contracting by .5% in Q1. The estimate was for up .5%. Goods exports rebounded which offset a slowdown in retail sales. The Hang Seng was up by .8% to close at its best level since November.
The Euro area economy was confirmed in the revision that it grew by .3% q/o/q, in line with the estimate and the first print. The Germany economy surprised to the upside with .4% q/o/q growth, twice expectations but Italy saw no growth vs the forecast of up .2%. Italy now joins France as seeing zero growth in Q2. We are just two months away from a crucial vote in Italy on whether to eliminate the upper house of parliament which would ease law making (Italy has had 60 different governments over the past 70 years) and if it loses, Renzi resigns and Italy will be even worse off. This GDP data is of course pre Brexit.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.