We have a busy economic calendar this morning, with Retail Sales and Wholesale inflation readings for May. Beyond the U.S. shores, we have key economic news out of China as well. The overall positive tone of these reports, particularly the Chinese news, should give stocks a positive nudge after persistent weakness in recent days.
Let’s take the positive Chinese news first. Typically, monetary tightening in China (as elsewhere) would be considered a net-negative, as it would increase the odds of an economic slowdown. But Tuesday’s reports about industrial production, inflation, and tightening is a net positive as it indicates a so-called "soft-landing" or moderate slowdown for the Chinese economy.
The growing fear about China lately has been that the economy would experience a hard landing in the face of persistent tightening moves by the Chinese authorities. Today’s reports should ease those fears.
China raised reserve requirements on Tuesday after inflation numbers came ahead of expectations. Chinese CPI reading in May came in at 5.5%, compared to 5.3% in April and the central bank’s 4% target. In response, the central bank raised bank reserve requirements, the 6th such increase this year and the 9th since October 2010, by 50 basis points to a record 21.5%.
In addition to key positive news on the Chinese growth front, we got favorable industrial production numbers for May. The benchmark measure of industrial production increased 13.3%, only modestly below April’s 13.4% pace. These numbers show that economic growth is moderating at a modest pace, belying fears of an economic hard landing. This favorable outlook should help support basic materials, commodity and other cyclical sectors that had been losing ground lately.
On the U.S. front, we got a relatively benign wholesale inflation reading. The May Producer Price Index (PPI) came inline with expectations, both on the headline as well as ‘core’ basis.
The more important inflation reading is the May CPI, which comes out Wednesday. The CPI report is expected to show continued pricing pressures, which the Fed believes are due to temporary factors.
The bigger worry on the U.S. economy front is not inflation, but growth. And on the issue of growth, today’s Retail Sales numbers paint a less-than-reassuring picture. The point where the growth and inflation debates come together is the Fed. The thinking is that a hotter-than-normal inflation reading limits the Fed’s ability to provide further stimulus to the economy, even as it sees growth faltering as is the case at present.
Retail Sales for May came modestly better than expected on the headline basis, but were relatively softer than expected on the ‘core’ ex-autos level. Headline Retail Sales dropped 0.2% in May after rising 0.3% in April. The headline drop, the first since June 2010, reflects weakness in auto sales due to lingering Japan-related effects and soft gas station sales given the recent pullback in fuel prices. Please keep in mind that the retail sales data is seasonally adjusted, but not inflation adjusted.
Retail Sales help us take the pulse of the all-important consumer, who single-handedly shoulders roughly 70% of the U.S. economy’s weight. Retail sales account for roughly one-third of total consumer spending, and measures spending at department stores of goods, with the other two-thirds of consumer spending coming from outlays on services.
At current levels, consumer spending appears to be on track for a pace that is lower than the first quarter’s 2.2% pace. We will have to see if consumer spending will improve in the coming months, as current expectations of the second half imply.
On the earnings front, we had a solid earnings and revenue beat from Best Buy (BBY). The electronics retailer also provided positive revenue guidance. Same-store sales, while down, came in better than expected.
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