THE ECONOMY:
Retail sales surprise with sharp April rise, but what is it telling us?
1.4% was well ahead of to 0.7% anticipated. Ex-autos were stronger as well at 1.1% (0.5% expected). Moreover, March was revised higher to 0.4% from 0.3% overall, and 0.2% from 0.1% ex-autos. This was the strongest retail sales showing since October 2004's 1.8% gain.
The gains were not limited to just one area as is sometimes the case when autos outperform one month and then lag another month. Autos were indeed up (2.5%), but so were apparel sales (2.8%), department stores (1.3% after -2% in March), general merchandise (1.5%), building materials (1.2%). Those are all good indications for the economy and all contributed to the upside surprise.
What about gasoline, right? After all sales are measured in dollars not units. Thus a rise in prices is considered a rise in retail sales and thus it may not really show the true picture. Thus if we spend more on higher gas prices the economy isn't really doing better because it costs more to pay for fuel and that diverts money from discretionary spending where the real measure of economic strength lies. Gasoline sales did rise 1.9% and thus they did skew the rosier picture a bit. But the gain was less than the 2% rise last month; kind of like being happy about getting beat with a smaller stick, but at least the pace of the increase softened. Still even if you take out gasoline, retail sales rose a solid 1.3%.
Usually we can find plenty of reasons to pick apart a report. Here is our best shot at this one. First, with an early Easter the sales figures were skewed in March and April. The feds apply seasonal adjustments to the numbers, and when the numbers are not as expected, those adjustments exacerbate the outcomes. Thus March was probably stronger than it was reported (the revisions indicate that) and April was probably not as strong as Thursdays numbers suggest. That, however, is like passing the goods from one hand to the other; the pie is still pretty much the same size. Not much of a tear down of the number there.
Second, there is inflation in the economy. Retail sales measures dollars not units. Thus if you have to spend more dollars to buy the same number of units, higher retail sales is not a great thing. There are inflation adjustments made, but many have no faith that the government is accurately reporting inflation levels, so sales may still be exaggerated by rising costs. Maybe. Given the number that is splitting hairs pretty fine.
Third, Wal-Mart missed its earnings, guided lower for Q2, and said meeting the full year target would be difficult. It blamed gasoline and the weather. Gasoline is somewhat plausible but everyone curses the weather. Sure it was cool; the spring here was one of the best in years despite global warming that, based upon a magazine I received the other day, is changing everything from glacial melt rates to fertility in snails. There were not a lot of major weather disasters, however. What we are hearing from suppliers is that WMT simply had the wrong marginal products available. It always has the same staples, but it is the marginal or seasonal products that make the difference. We hear it did very poorly with its choices this spring. Further, TGT beat its earnings number. With overall retail sales solid and WMT's chief rival beating the street, to say WMT shows the retail sales numbers to be overstated is like saying everyone is out of step but Johnny.
Thus, all in all it was a solid report. Consumers appear to be doing the usual: saying one thing and then doing the other, and of course, consuming as their namesake would suggest. Despite carping about the jobs data being overstated, crappy jobs being created, and the consumer in worse shape now than during the recession, the consumer is saying otherwise.
Oil opens below $50/bbl, breaking the near term hold that level has on crude.
Oil opened just below $50/bbl Tuesday, and we talked with a few traders ready to buy once more on a move below 50. A classic example of using something until it doesn't work, or as the saying goes, going to the well one too many times. Oil tried to bounce but it had no legs. It reached down and nothing was there. It failed at $50 and then quickly fell to $49. It bounced there but then fell below that mark to close at 48.54, -1.91. Oil proved to be tougher than thought, holding at 50 again and rebounding earlier in the week back to 52/bbl. It is making lower highs and lower lows, however, classic signs of further weakness. Oil needs to get to $42/bbl to be a really significant to the economy, at least in a positive way, but the 45 level is likely where it will land.
At the same time the dollar index has returned to its 2005 highs, the third trip this year and the second in the last 4 weeks. After making a higher low it has rallied once more, Wednesday getting a boost from the smaller trade gap and Thursday from the retail sales numbers. It better be careful or it may breakout in a case of strength. Not a lot of talk about this move, but when you do hear it you would think the dollar was about to return to its old glory days. Hardly. In early 2002 the DXY0 was at 118. in Q1 2004 it rallied and peaked at 92 for the year. It is now at 84.87 and still in the downtrend. Thus, don't get too excited about the strength. Moreover, though a stronger dollar could eventually crimp exports and balloon imports again, it is still a long, long way from being at lofty heights. Indeed, it is no higher than the levels where we enjoyed that smaller trade deficit last month.
Gold was down $6 Thursday as it remains in a steady slide lower. The Philadelphia gold and silver index is in a massive downtrend, sliding lower below the 18 day EMA. That is an indication of a strong downtrend. Now if inflation was truly a problem why is gold not moving higher? Gold showed the same action from 1996 to 2000 when it trended steadily lower as the economy and dollar surged. No inflation then, and it was not showing inflation as it was in that downtrend. Once more it is not showing any inflation indication.
When you put these together you see a picture of no inflation and a stock and bond market forecasting weakness ahead despite an expanding economy. That adds up to one thing: a healthy economy not generating a lot of inflation, but one that is destined to at least struggle due to Fed rate hikes. In sum, as we were discussing this tonight in the office one of the researchers said, "Damn it, the Fed is doing the same (bleeping) thing it did in 1999 and 2000. |
