Name: Understanding Inflation and Unpacking the Latest U.S. Retail Sales Report
Uploaded: 2023-07-18T14:57:00Z
Duration: 16 min 43 s
Description: With price increases slowing down, the June retail sales report gives an update on which businesses are thriving and which are struggling. WSJ’s Dion Rabouin explains what the report and the latest CPI data say about the state of the economy. Photo: David Zalubowski

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With price increases slowing down, the June retail sales report gives an update on which businesses are thriving and which are struggling. WSJ’s Dion Rabouin explains what the report and the latest CPI data say about the state of the economy. Photo: David Zalubowski

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Understanding Inflation and Unpacking the Latest U.S. Retail Sales Report

Hey, out there. Welcome in, welcome, welcome, welcome to another edition of 'Market Takes.' Today, we are breaking down the latest US retail sales report. It seems like the start of, what I've decided to call, Soft Landing Summer. We got Soft Landing Summer going on right now. We're gonna take a look, I'm gonna explain to you what that means, I'm just gonna leave it out there, but a retail sales report that I think has got a lot of folks out there in the markets excited, we're gonna break all that down. We're gonna talk about what this US retail sales report showed, how that compared to expectations. We're gonna of course talk about the market reaction, we're gonna take you through how markets reacted to this report. We're gonna talk about earnings and how this earnings season, what we've seen so far, has kind of really locked in the report and what the report showed, and really backed that in terms of what investors are thinking about the market and the economy. And then we're gonna talk about the Fed meeting because, of course, we know that everything is based on the Fed, and that's why when we talk about Soft Landing Summer, that's really what it's all about. It's all about these expectations for the Federal Reserve and what they're gonna do at their meeting next week. Of course, we'll be here on Market Takes. We hope you'll be with us as well. Last thing, we're gonna talk about what comes next, 'cause we are always looking forward, even though it is backward-looking data. So first things first, let's talk about today's report and the numbers that we saw. I wanna throw up here on your screen a chart of what we've got from the retail sales report. Now, what you see there is on the right of your screen, you see three straight positive reports. Today's report was 0.2% increase month over month, so June sales rising 0.2% from May. May was actually revised higher. So you had a 0.5% increase in May, and so you see those numbers over there on the right looking pretty healthy after we had seen four of the last seven reports coming in being negative. And you see those two bars there going lower, and then you see that big increase in January. Before that, we had two negative reports, so there was some worry that we were gonna continue on this downward trajectory, that we had reached this place where we were just moving lower, that retail sales were gonna be negative. That was definitely a bad thing for retail, it was a bad thing for the economy. But what we have seen the past three months is a reversal of that trend. Now, wanna direct your attention to a different chart, wanna put the year over year change up here on your screen, in terms of what we're seeing on retail sales, and what you see there is a bit of a different picture. You see that retail sales number just going consistently down. And when we talk about Soft Landing Summer, this is what we're talking about. Now, this is comparing to a year before. You see those numbers there on the left side of your screen? Those are going high above 10%, above 15%. Then you see us come down. And the big thing about retail sales is retail sales don't take inflation out of the picture. So as we're seeing inflation come down, we have seen those retail sales numbers come down, and that's what the Federal Reserve wants to see. When we talk about a soft landing, well this is what they wanna see. They don't wanna see those numbers going negative, turning bad, and then the economy goes lower and folks go out of business, they start laying people off. No, no, no. What the Federal Reserve wants to see is exactly what you're seeing up there on your screen, which is those numbers start to come down, retail sales start to reduce lower, you start to see a deceleration into maybe a slowdown, and then the economy can start to pick back up as we move back towards two percent inflation. So you don't really wanna see zero, you don't really only wanna see negative. What you wanna see is the number for June is 1.5%, so you've got a 1.5% increase. Again, it's from that number on the far left side of your screen. So what we have seen is a small increase from a very high number, and those base effects are gonna start to play a real big role as we move forward and as we continue. Because you see, as you see there on your screen, the numbers are lower so we'll have a lower number to compare to when we get into September, October, those fall numbers, because inflation was declining, retail sales were declining. But from what we're seeing right now, we are seeing just the sales slow down, not stop, not crash, not move to a strongly negative print, but just slow down to a slower increase, a slower pace of increase. So retail sales still picking up on a year-over-year basis. But again, this just illustrating that we are seeing this slowdown, and again what I'm terming Soft Landing Summer. If you hear that anywhere else, they stole it from me. We came up with a right here on Market Takes first. Don't forget, don't sleep on us here at Market Takes. Listen, when we're looking at where consumers are spending, right? Because we've gotta dig into these numbers a little bit to find out, "Okay, what is this really saying to us?" Even those numbers are pretty positive in terms of what it means for the Federal Reserve. So we saw spending online continuing, really leading all categories for the monthly gain of 1.9% month-over-month, and up 9.4%, almost 10%, year-over-year. So those online sales, what they call 'non-store retailers,' staying strong. Bars and restaurants, the service industry, well that is still positive, up 0.1% month-over-month, but up 8.4% year-over-year, so looking very similar to the overall chart. We are seeing services inflation, as in what you're paying for services, like when you go out to a bar and get a drink, when you go out to a restaurant and people serve you, when you go get your haircut at the barbershop, or go to the auto mechanic. We're seeing that really holding up inflation, but what you don't want is for it to be pushing inflation too high, which is what we were seeing last year and earlier in this year, which is the inflation rate and the sales rate. Because we know when people are going out, spending money, they're buying, buying, buying, well, we know prices are going up and if people are paying those high prices, the prices just continue to escalate, and that's not what the Fed wants to see, that's not what you and I wanna see. Those higher prices? we don't want that. We want inflation to come down and really get those price increases more in control, see that deceleration. One big surprise, I think, in terms of the positive side, was the big increase in furniture and home furnishing sales; Up 1.4% month-over-month but down 4.6% year-over-year. So furniture and those things, home furnishings, had been declining pretty consistently, and then this month, you saw a surprise pickup, 1.4% month-over-month increase. We'll see if that's just a one month blip, maybe things got off on a weird track, maybe Big Mike's Furniture Warehouse had a big sale and that just pushed the data up. But what we are seeing is a notable month-over-month increase that's also down 3.2% over the last six months. So going against the trend is basically what I'm saying for furniture and home furnishings. The biggest decreases, gasoline stations, that has been consistent, and that's a lot of why you're seeing those consumer sentiment numbers really take off. We saw the latest University of Michigan Consumer Sentiment Index push way above expectations, and a big part of that has been the decline that we have seen in gas prices. Well, we know when gas prices go down, gas stations don't make as much money, and that was down 1.4% month-over-month, 22.7% year-over-year. So gas station revenue really just, boo, diving lower. and again, that's not good if you're a gas station owner, but that's great for the average person who's gotta fill up the truck to get to work, or fill up the car to get to work, and they're spending less on gas stations than they were, about 23% less than they were, a year ago. Sporting goods, hobby, musical instrument, and some books, those down one percent month-over-month, about 1.3% year-over-year. Building materials, garden supplies, also down. The big picture here is goods versus services. We know that goods are falling because we're just not spending as much, going out and buying things like tables, air conditioners, stuff like that for our house, and we're spending more on services, going out having a good time. But what the Federal Reserve does not want to see is too many people going out and pushing those services prices way up. That's not what we're seeing in this report. Overall, you're not seeing a major acceleration in services data, that would contrast or offset the decline we're seeing in good prices. So good prices, declining; Services, holding up. And that's holding those retail sales numbers above flat, above zero, at 1.5% year-over-year, 0.2% month-over-month, like we saw this month. So that's the big picture takeaway when it comes to this report. Now, let's take a look at what we're seeing from the markets, and I wanna direct your attention to the big picture overview. We're seeing some interesting things happen in the stock market, I think. Much more a reaction to the earnings reports that we've seen. But want to throw up here, on your screen, the market reaction that we are seeing. And so, this is the big picture overview. What you're seeing there is the NASDAQ, that's negative overall on the day, but the Dow is up about 0.34%, and the S&P 500 about flat. So what we're seeing is a mixed reaction. Like I said, I think the NASDAQ is reacting to some of those bank earnings. We saw actually a number of smaller banks are in the NASDAQ, and the earnings reports we saw this morning are a bit of a mixed picture, but those bigger banks and some of those big picture things that it says about the economy, as in... And I'll talk to you a little bit about that later, we won't get too much into that now. But I think that's why you're seeing the reaction from the stock market. When we look at bonds, another interesting thing I saw, and I wanna direct your attention here to the 30 year bond yield and what you're seeing there, right? A pretty limited reaction. The data came out around eight o'clock, so that's right around this area when we're talking about reaction. So pretty minimal, right? 10 year, you see about the same thing. As we get lower in yield, you start to see a bigger reaction from that data, but then that filtered out. So five year you're seeing an even bigger reaction. Right down here, boom, you see this takeoff. Around the three year, even bigger reaction. And the two year, which is most closely tallied, or most closely aligned, with expectations for what the Federal Reserve will do, you did see a big reaction but that has kind of petered out of the data. Let's talk really quickly about currencies. Not much reaction here from the data, but did see an interesting reaction, I thought, from Bitcoin. When we look up here at Bitcoin, a big turndown after that data. We don't know if that's necessarily related, it could be, it may not be. Bitcoin obviously much more traded by big time Wall Street investors these days than it was, but still often its own story. And as you see right there, a big pickup in crude oil that we've seen recently. This wasn't really in response to the data, but a pretty solid increase. But you're seeing across the board... Except for copper, one place you might wanna look at, "okay if there's something to worry about," those copper prices lower, but not a big reaction from the data. And this really just kind of illustrating the reaction, or maybe lack of a big reaction to this data, because a lot of this was priced in, right? The reason that we're calling it Soft Landing Summer, and not Soft Landing June or Soft Landing Retail Sales report, 'cause the data has pretty consistently backed this theme, that things are starting to slow down, inflation's slowing down, job gains slowing down, retail sales slowing down. Not falling off a cliff, not halting, not backing up and turning negative, but just slowing down, doing exactly what Fed Chair Jerome Powell said he wants to see from this data. That's exactly what we're getting. Let's talk really quickly about the earnings reports that we saw, that we've gotten today and then going back to last week, because they have really backed the story of, again, this Soft Landing Summer, and perhaps a pickup and acceleration that gets the economy kicked back into gear. That could be good, that could be bad, but we'll talk about it and cross that bridge when we come to it. Bank earnings so far have shown increases in loan defaults, but still we are historically low. So we're seeing loan loss provisions increase just a little bit. That's banks saying, "Hey, we're a little worried "about what's going on, 'we're gonna put a little more money to the side "just in case people aren't able "to pay back their loans." But they're not doing that at a big scale, they're not doing it in a big way. So we are seeing just a little bit of caution. Customers at JP Morgan, Wells Fargo, Citigroup, spent more on credit cards, more borrowers carrying over those balances. I've been telling you all for months to watch those credit balances, but those numbers in terms of the comparison to the previous month have been declining. We are seeing lower use, in terms of month-over-month. Still, year-over-year, you're seeing a pretty big pickup in terms of credit, folks still borrowing money to pay for things. That could be worrisome in the long run because we have seen the price of credit, or those interest rates on credit cards, continue to rise, and we are still at historically high levels. But right now we're not seeing defaults, we're not seeing folks not paying back their debt. And the banks really reconfirmed that and reiterated that for us. Citigroup CEO Jane Fraser said, "Overall, I'd say we are seeing "a more cautious consumer, "but not necessarily a recessionary one." Again, we're talking about it, Soft Landing Summer. Morgan Stanley reported earnings just this morning, really kind of... Their CEO, James Gorman, reiterating the same thing. Their second quarter profit fell 13%, but they were hurt by a... They were hurt a lot by the decline in trading revenue, not necessarily anything in terms of their consumers. CEO James Gorman saying, quote... Saying, sorry, this isn't a quote, but a summation of what he said. "Client activity was subdued "to start the quarter "but ended on a stronger note." We were seeing that really across the board. We heard that from JPMorgan in their earnings. We heard that from Citigroup CEO Jane Fraser. Really, a pickup overall at the end. Folks are starting to turn a corner in terms of their confidence in the economy and we are seeing that overall. Bank earnings show Americans bank balances and how they're spending their money, and we have learned the consumer really is in okay shape right now. Not anything to be worried about. Slowing down, more cautious. Those are good things, right? That's what the Fed wants to see. The other interesting thing though, as we talk about and we move to what's going on with the Fed, investors still very much expecting the Federal Reserve to raise rates at its meeting this month. That's gonna be next week. And we'll talk about that here in just a second. But this really telling us that things are slowing down, they're not screeching to a halt, and that there's not really anything that you should be worried about. This is exactly what the Federal Reserve wants. Again, that's what the data tells us so far. So right now, where we are seems like a good place. Let's talk about the Fed meeting right now. Right now, when we look at the Fed Funds futures market, investors have placed a 97% likelihood that the Federal Reserve will raise rates at its next meeting. So I wanna put up here a chart on your screen to just give you an idea of where we are, right? You see those Fed rates, this is the Fed funds rate, where we are over there on the right of your screen. This is as high as we've been really at any time in the past 20 years. This chart going all the way back to 2000. And you see there, we are approaching those levels, those highs of 2008. Those rates were kept there for not very long, and then the Fed had to start cutting as we were going into that recession. But historically, we are at a very high level, in terms of where the Fed has rates. And the Fed is again expected to hike, a 97% likelihood among investors that they will raise rates again in a week on July 26th. We hope you'll be right here on Market Takes when we break down that decision, break down the press conference and all that. But just wanna put this chart up here on your screen to illustrate where we are, and where we've come from. And we have now gotten very high up on the Fed Funds rate, and that's just kind of where we are. So when we look out at this upcoming Fed meeting, I think this report, along with some of the other data, is gonna potentially give folks a reason to say, "Hey, whoa, whoa, whoa. "Why are you guys trying "to raise rates again? "We got Soft Landing Summer happening already. "Why are you guys raising rates?" But that's what the Fed has locked in, they've really locked in the market. And it would be a very big surprise if they did not raise rates by 25 basis points at their next meeting, coming up next Wednesday. So you're gonna wanna watch out for that. I think this definitely locks in rates. Investors were expecting just one increase this year, and that's gonna be in July. And then, really, the market is predicting the Fed will not raise rates again for the rest of the year, going all the way up to December. This certainly locks that in, and really I think cemented those expectations. And also though, the question becomes, "Is the Fed now doing too much?" Those folks who have already said, "You know what? "The Fed shouldn't have raised rates this high, "they shouldn't have done it," they are gonna be louder now, as you hear from them, "Oh, well look at retail sales," that report's already coming in, it's already coming down. "We already got Soft Landing Summer. "What are you guys doing?" That's gonna be an interesting debate and we will see how that plays out. What comes next? Well, the earnings reports keep coming this week. We got Tesla, and Netflix, United, Johnson & Johnson, a whole host of others. You're gonna wanna watch those because I think those gonna tell us a lot about the economy. The Fed meeting next week will be highly watched, not for what the Fed does but for what the Fed says. We will be here 4:00 PM Eastern, doing Market Takes on Wednesday. I hope you'll be with us there for Market Takes. The second quarter GDP report comes out, that will be tightly watched because of how much GDP for the first quarter was raised over expectations, and we could be seeing a repeat of that in the second quarter number. And of course, we'll be talking about all that on Monday, doing our look ahead for Market Takes. So listen, I am Dion Rabouin, reporter for the Wall Street Journal. Appreciate you guys being with us, and we hope that you'll do it with us and be with us again next time.