Name: September’s Retail Sales Shows Consumer Sentiment on Inflation and Recession Fears
Uploaded: 2023-10-17T14:42:00Z
Duration: 16 min 34 s
Description: Inflation has picked up in recent months, with prices rising on everything from gas to food and insurance. WSJ’s Dion Rabouin explains how the latest U.S. retail sales report will provide the Federal Reserve the most important data point yet on the state of U.S. consumers. Photo: Jamie Kelter Davis/Bloomberg News

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Inflation has picked up in recent months, with prices rising on everything from gas to food and insurance. WSJ’s Dion Rabouin explains how the latest U.S. retail sales report will provide the Federal Reserve the most important data point yet on the state of U.S. consumers. Photo: Jamie Kelter Davis/Bloomberg News

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September’s Retail Sales Shows Consumer Sentiment on Inflation and Recession Fears

Hey everyone, what's going on? Welcome, welcome into another edition of Market Takes. Today, we are breaking down these surprising, stunning, really rising unexpectedly, the retail sales report. I couldn't think of another R word. My apologies out there to everyone. Welcome in. I am Dion Rabouin, reporter at the Wall Street Journal. We were looking at the September retail sales report which came in a good bit hotter than expected. In fact, more than double what economists had been predicting. This kind of rides a theme that we have seen over recent economic release data thus far over the last month or so. We are gonna talk through all that. Here's what we're gonna talk about today. We're gonna talk about what this retail sales report showed, how that compared to expectations. We're gonna look at how the market reacted because the market has had a big reaction to this piece of data today. We're gonna talk about what this tells us about inflation, what this tells us about the possibility of a recession. Because I think two big questions, at least for right now have been answered by this report. We are gonna talk about looking forward to the November Federal Reserve meeting that's on November 1st in just a couple weeks. The Fed's blackout period is coming here in just a moment. And of course, we'll talk about what comes next because we are always looking forward, even though it is backward-looking data. Here on market takes, that's what we're all about. So let's get into it. First things first, the retail sales report rose by 0.7% month over month. A much larger than expected increase. And I wanna throw a chart up here on your screen right now so you can see what we're looking at in terms of the long-term trend. Now this report would've been the strongest we had since the beginning of the year, but August was revised higher. So we had seen August come in at 0.6%. We were expecting to get a 0.2% or a 0.3% increase month over month. Instead, we got a 0.7% increase and you see there on your right of your screen if it looks like those bars are rising up higher than they were, well, that's what's happening. We had seen four out of five negative reports on the month and it looked like we were maybe trending lower, moving towards consistently negative reports on the retail sales number. And these last three months have really reversed that trend including this revision higher for August and this month at 0.7%, really showing that consumer buying remains strong that folks are still going out there spending money. And this was really widespread. So this chart right here, just illustrating what we have seen from retail sales and the change that we have seen month over month, as you see there, a consistent increase even when you break out different categories, the retail sales X Autos was up 0.6%. That compared to expectations of 0.2%. So three times the the increase expected when you look at the retail sales, number X Autos, why do you look excluding automobiles? Well, because autos are a big ticket item. People spend a lot of money. So when you take out Autos, you can get a more clear picture of what's going on in terms of what people are buying. And still, even when you take out Autos, there was a big increase overall. Last month, retail sales rose 0.8% like I said. So we are seeing this consistent acceleration in spending. Remember these are not adjusted for inflation. So what you could be seeing rather than folks going out buying more things, what you could be seeing is just an increase in prices and folks are having to pay more money for those same things. I think Wall Street right now, this shifts the window a bit in terms of what traders and investors, what the Federal Reserve is looking at. What there was worry about was, okay are we seeing maybe the economy kind of grinding to a halt? Are we seeing, you know, jobs starting to slow down, spending starting to slow down, growth starting to slow down and this really changes that. Now it's okay, well now, we're back to where we were before. Is inflation rising higher? Are people spending too much? And that really changes the way that you look at upcoming economic releases. It changes the way that you look at these incoming earning reports and it changes what we're expecting to hear or what the way we'll interpret and the way investors will interpret what we hear from the Federal Reserve. So big picture, like I said, there was widespread spending eight of 13 categories rose for the month. Best was that miscellaneous category, which as its name suggest is all kinds of different things. But non-store retailers, that's basically online, basically Amazon. You could throw in Walmart Target some of the bigger online retailers there, that was up 1.1% motor vehicles and parts up 1% gasoline stations up 0.9%. Food and drinking establishments also up 0.9%. Health and personal care up 0.8%. I tell you all that just to tell you that this was across the board, this wasn't just gas, this isn't just okay, people are paying more for gas and that's what's driving it. No, this is health and personal care. This is motor vehicles, this is online, this is widespread across the board. Increases in spending. Only two things that were down where furniture sales was actually zero on the month. Electronics and clothing were both down 0.8%. Building materials down. That might be something to watch because another thing you could point to as well, this is early holiday shopping. No, holiday shopping would be in those clothing and electronics numbers. That's what typically is what folks are buying for those Christmas holiday, Hanukkah, Kwanza, all the holiday sales that you wanna get into. That's usually what folks are buying there. It's those clothing items, those electronics, those are actually down. So we are not seeing this being a push forward of holiday spending. What we're seeing is just a widespread increase in spending that could be because prices are higher, it could be because folks are buying more things. Wanna throw another chart up here on your screen and let's talk about the year over year change in the retail sales number. Now what you see there is another acceleration widespread. And this number that we got in September was the highest we've seen since February. So again, what we had seen coming into this from retail sales, I called it soft landing summer through May, June, July, you saw a decrease moving downward, moving towards zero, right? You had seen these retail sales in terms of compared to where they were a year before moving lower. Now what you were seeing is they're moving back higher. And again, we are comparing to lower numbers. So as we're looking at September, you look at September of 2022, there on your screen, that was lower, right? That's coming down from where we were in the summer of 2022. So as we're comparing ourselves to where we were a year ago, those numbers were lower. And now these numbers are higher which suggest that inflation is being sticky, inflation is sticking around, it's not going away. Maybe inflation when it was moving lower was just compared to those very high numbers that we got in the summer of 2022. And now that those comparisons are out the window, we are moving back higher again, suggesting that inflation really isn't going away, it just is staying at a kind of sticky point. That is not what the Federal Reserve wants. And this chart just really illustrates some of the ways that one can look at what's going on in retail sales, look at what's going on in the economy and maybe have some worries about that inflation sticking around for a bit longer. Let's take a look at what we're seeing from the market. Wanna throw a chart up here on your screen or throw the market action up here on your screen. What you're seeing right there is the stock market right now. Overall, we're seeing stocks move lower, pretty decisively lower on the Nasdaq. I will say the initial reaction right off of this report was not significantly down. I expected, you know, when you got this big blowout number on retail sales, that what you'd see is stocks really start to sell off and move lower. Because again, that could mean the Federal Reserve has to raise rates. That could mean rates could be higher for longer. But what we are seeing is as the day has gone on, the mood has gotten decisively, more bearish, excuse me, on the S&P, but on the Nasdaq, you see we're moving back up. So keep an eye on the stock market. What you could see is stock investors really start to say, "Hey, you know what? Maybe this is not so great for the Federal Reserve, but seems like consumers can handle it. Seems like companies might actually do better. They might be doing okay, they can raise prices. That means fatter profit margins. That means stock prices go up." Especially when you look here on the Dow, which is where you see most of those consumer stocks. You saw a move higher and you saw a move initially lower, right? Significantly lower. But now, we are moving back higher. Let's take a look at what we're seeing in the bond market right now, especially on the 10-year. There is a clear reaction. The the 10-year note up, almost 15 basis points, a huge change. And you just see this ratcheting higher right now. This is going on the 30-year, the seven-year, the longer dated bonds, which is expectations for the economic growth, expectations for longer-term inflation. Those are rising significantly more than what we're seeing from the two-year note. You see the same pattern there, but only up about six basis points as you see there on your screen. So, the big move has been in the longer-term inflation expectations and the longer-term growth expectations. This is why that GDP report is gonna be big later on next week. So when you look at the year to date numbers, boom, what you're seeing there at the edge here, we are moving towards the highest levels of 2023, could be moving back towards those highest levels in 16, 17 years for the 10-year, the third year, you're seeing a similar pattern right there, moving back towards those highs. Even on the two-year, you're seeing we're moving towards the highest levels of the year and we know the highest levels of this year are the highest levels we've seen since 2006, 2007, depending on which note you're looking at. So treasury yields staying high, rising back towards new highs on the back of this retail sales number. You're not seeing as much of a strong reaction from currencies. We see the Euro right now, getting back higher, the WSJ dollar index and the US dollar index moving higher. But then kind of coming back down from that. So really, this just illustrating the market reaction and the way that markets have responded to this report. Like I said, you got a big reaction especially in the bond market. Stocks a little undecided, but right now, pretty clearly and negative especially for the Nasdaq, those high flying tech stocks. As rates stay longer, it becomes harder for a lot of those companies that don't make a lot of profit, right? They're expected to grow by a lot and that's why their stock prices are high, but they don't make a lot of profit. It's gonna be harder for them to stay in business and keep churning around and keep delivering profits on those stock prices for investors. So, keep that in mind. The big question now, what does this tell us about inflation? Well, let's throw another chart up here on your screen right now and talk about just that, right? This is the CPI, consumer price index and we see, again, they're the exact same theme, right? Prices coming down, inflation coming down into the summer and then picking back up as we start to compare to those later months in 2022. Again, we're seeing inflation stay high. What this suggests as inflation came down last year, as we compare to those numbers that we got in 2022, inflation this year could be higher on a percentage basis because again, you're comparing to the base level of a year before. We are seeing month over month inflation consistently rise. We're seeing retail sales rise. And what we are seeing is inflation sticking around at this 4% level. And this just, you know, this CPI chart just illustrating the theme that we have seen over overall in an inflation, what we've seen in retail sales, a similar trend has been happening in terms of the jobs report. We are seeing a pick back up in acceleration. We're not seeing it kind of come back down and as CPI stays well above the fed's 2% target, that could mean they have to raise rates again this year. That could mean that they have to keep rates higher, maybe even raise rates more in 2024. If you remember, we talked about this here on market takes when we broke down the Fed's latest meeting. There were a number of Fed officials, 12 of them who thought rates will need to be raised one more time this year. And then a number of Fed officials thought, next year rates could be even higher. You saw one or two people on the FOMC say, "We think that by the end of 2024, rates will need to be even higher than they are now." That's not a prospect that much of Wall Street and most investors have really considered, they've thought, "Okay, maybe rates will be higher for longer. Maybe we'll just stay around this five, five and a half level where we are now." Rates could go up to 6% if inflation doesn't come down. And in fact keeps accelerating in the theme and in the trend that we have seen over the past few months from retail sales, from CPI, from PCE, the other big inflation gauge that the Fed watches, you could see inflation pick up and that would mean that the Fed likely is going to raise rates as well. And again, like I said, we've seen that same thing from the jobs report. We added 336,000 jobs in the US last month. That was way more than expected. About double, in fact, almost double a similar theme that we've seen in this retail sales report today, which is retail sales coming in twice as strong as what economists had expected. What this says about recession and the possibility of a recession late this year into next year? I think that might need to be really reevaluated. We might need to really rethink the overall state of the economy. When we look at this consumer price index number, when we look at today's retail sales number, folks are still going out and spending. Other thing you wanna keep your eye on is credit card delinquencies. Those have risen back up to pre-pandemic levels. If you remember during the pandemic, folks paid down that debt. They said, you know what, I wanna get rid of this debt. I wanna pay off things that I was buying. I wanna pay off my credit cards, pay off some of these personal loans. Well, that's re-accelerating now. Folks are going delinquent on their credit cards, they're putting a lot more on their credit cards, and those rates are rising not to levels that are necessarily considered problematic. But again, we have gone away from that pandemic trend of paying down debt and have gone back to the trend of adding more debt. Credit card debt reached 1,000,000,000,000. US consumers carrying 1,000,000,000,000 on their collective balances right now. So that's definitely something you also wanna keep an eye out for. The idea is, you know, the consumer has been in distress. Well, if the consumer's in distress, they got a funny way of showing it. 'Cause they just keep buying things. And as we've said here, a number of times on market takes, if consumers keep buying, companies will keep raising prices and that keeps inflation moving higher. The market is seeing the Fed is more likely to raise rates in December. Still, there's a 55% chance according to the Fed Fund's futures market. As I check here on my screen that the Fed will not raise rates in November or December, but that's much lower than it was earlier on before this report. Fed Fund futures showed a 65% chance yesterday that the Fed would not raise rates any 73% chance a week ago. The Fed would not raise rates by December. That's down to 55% and watch out 'cause that could continue to move. What to watch out for next? We got the housing starts report and the Fed's beige book. That's the Fed's report from various business contexts around the country on how the economy is doing. You'll wanna watch out for that. Is that starting to tell us what this retail sales, number's telling us, what CPI is telling us, that really the problem isn't that consumers aren't buying, it's that prices just keep picking back up and rising and we get lots and lots of Fed speakers through the end of this week. We got Fed governor, Miki Bowman. We got Fed governor, Chris Waller. We got Philly Fed President Harker. Richmond Fed President, Barkin. Chicago Fed President, Austin Goolsbee. Dallas Fed President, Lorie Logan. Atlanta's, Raphael Bostic, all coming out and speaking before the Fed's blackout period on Saturday. Those Fed speakers could move the market in a big way. You're gonna wanna watch out for anything that someone on the Fed says because now that we're in this new environment, where it's all about will they, won't they? Will the Fed raise rates again? Those Fed speakers could move the market in a big way. Watch out for those rest of this week. Next thing, leading economic indicators and existing home sales report. Those are both out on Thursday and then we get Q3 GDP next Thursday. That is going to be a big report because if it shows the economy grew more than expected. Well, you could see a big market sell off and a return to the lower stock market prices that we had seen back in September. Watch out for that. I know that's crazy to think, right? Too much growth, too much GDP, too much the US economy doing too well, could send the stock market into a tailspin, but that could be what we see. Watch out for that next Thursday, October 26th. We'll be right here on market takes. I'll be breaking it down for you. Listen, that's gonna do it for us here on Market Takes. I'm Dion Rabouin, reporter at the Wall Street Journal. Don't forget, for more you wanna check out my podcast, WSJs, Take on the week. We cut through the noise to explain the major business and financial news that may move markets. 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