Retail Sales Report- Great July

Retail Sales - Very Strong July

Retail sales - the reports have mostly been good. I reviewed the strong Empire Fed reading in a previous article. Now let’s look at the great July retail sales report. The bad news is the June reading was revised lower and the good news is the July reading beat estimates. This means Q2 GDP could be revised lower and the estimates for Q3 GDP increased. I will take that tradeoff as the most recent data is the most useful in making economic forecasts.

As you can see from the chart below, month over month headline retail sales were up 0.5% in July which beat estimates for 0.1% growth. The highest estimate was for 0.3% growth. June retail sales were revised lower from 0.5% to 0.2%.

Month over month retail sales excluding autos were up 0.6% which beat estimates for 0.4% growth. June’s reading was revised from 0.4% growth to 0.2% growth. Excluding autos and gas, retail sales were up 0.6% month over month which beat estimates for 0.4% growth. The highest estimate was 0.5% growth. June’s reading fell from 0.3% growth to 0.2% growth.

The control group reading was the worst part of the report in June. It was revised down from no month over month growth to a 0.1% decline. This metric was up 0.5% in July which beat estimates for 0.4% growth.

As you can see from the chart below, control group retail sales were up 5% year over year.

Retail Sales - This is one of the best reports of this cycle as the peak was 5.9% growth in July 2011.

Auto sales were up 0.2% in July, but they were revised lower from 0.9% growth to 0.1% growth in June. Restaurant sales growth was up 1.3% after increasing 1.6% and 2.8% in the prior 2 months.

Ecommerce sales were up 0.8% in July and 0.7% in June. In Q1 online retail sales were 9.46% of total retail sales. If online growth continues to beat overall sales growth, that metric should get to 10% by the end of the year.

Gas sales are going to start to be negatively affected by prices on a month over month basis as oil is down 7 weeks in a row. Gas sales were up 0.8% month over month because of the summer driving season.

Apparel and department store sales were up, but building materials were flat. Furniture sales were down 0.5% which is bad for residential investment.

Retail Sales - One of the Reasons For Dollar Strength

The strong dollar is the main cause of the increase in stress in the Goldman Sachs financial conditions index. It is worth reviewing in detail where the dollar can go in the future. To be clear, there is no perfect calculation which will tell us where the dollar index is headed.

You can use past events to estimate their effect on the dollar, but you can’t perfectly predict how those events will affect the dollar in the future and what new events and policies will be. I like to look at monetary policy in America versus international policy, relative economic growth, fiscal policies, demographics to determine where the dollar is headed.

I like building a narrative based on these factors to explain trends.

For example, the fiscal stimulus and the Fed’s relative hawkishness are helping the dollar index maintain this bull market.

The chart below goes into far greater detail than I can in an article because it uses prices amounts for 13 key factors. Global equity markets, policy search, global interest rates, Fed policy, energy markets, ECB policy, and BOJ policy are all helping the dollar.

Equity markets are having the biggest positive impact on the dollar.

Like I said, each factor can have its effect change and new events and policies can occur. I like to use this chart to clarify my narrative.

For example, it shows the relative importance of BOJ policy compared to ECB policy. Everything is interconnected which makes extracting each part of the calculation difficult. For example, monetary policy and consumer credit effect global equity markets. This chart could have avoided using equities and looked at relative economic growth instead.

 

Retail Sales - Goldilocks Is Making Her Return

With the ECRI leading index showing weakness and the 10 year yield struggling to stay above 3%, I have been on the hunt for some negative economic data. This hunt has mostly come up empty handed because reports continue to come in strong.

One other point worth mentioning is that with commodity prices weakening, the 10 year yield could be struggling to reach 3% because of low inflation, not low real growth. The fall inflation data should decelerate on a year over year basis because the comparisons from 2017 are tougher in the fall than in the summer.

As I mentioned, most of the economic reports have been strong, making the idea of an economic slowdown in the 2nd half look foolish. It will be interesting to see how the Fed reacts to this new Goldilocks economy where the economy grows quickly without producing much inflation.

If the Fed decides to pause rate hikes, it should be great for stocks. Some would claim this is bad news because the end of rate hikes signals a recession. However, the tax cuts providing growth and low inflation will easily counter that narrative.

In this scenario, the yield curve won’t invert as the near term yields would stop increasing and the long term yields would increase modestly as growth will be strong. The Fed could always resume hikes if inflation increases later on.

Retail Sales - Conclusion

The retail sales report means Q2 GDP growth will be revised lower unless there is a counterbalance positive revision in another data point. The strength of the dollar is very important for investors to follow as it is leading to the collapse of emerging markets, commodities, materials stocks, and energy stocks.

The good news is Q3 GDP estimates will be revised higher. I am beginning to get on the bandwagon that sees +3% GDP growth in Q3. There is almost no evidence of a sharp slowdown in the second half.

 

 

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