Stocks aren’t expected to do much in today’s session, with the major indexes appearing on track to finish the week modestly in the red, the first negative finish in more than month. Concerns about the Fed outlook ahead of next week’s FOMC meeting has emerged as a key overhang for stocks lately. This morning’s positive Retail Sales reading adds to those concerns.
On the data front, we got a favorable reading on consumer spending that will help hold estimates for GDP growth in Q3. The August Retail Sales growth matched expectations, but the positive revision to the July numbers is the reassuring aspect of today’s release. As we know, the ‘headline’ monthly retail sales number includes the sale of automobiles, gasoline and building materials, which fluctuate from month to month and distort the trend line. As such, excluding these items gives us a better measure of the underlying trend. In today’s report, the ex-autos and gasoline measures for August matched estimates, but the July measures for the same got revised higher.
The Retail Sales report isn’t a perfect proxy for consumer spending since it only includes sales of 'goods' at retail establishments and leaves out the much bigger consumer outlays on services. That said, it nevertheless provides valuable clues to trends in consumer spending, which is the backbone of the U.S. economy. This shows that the U.S. economy started the third quarter on a fairly positive note, particularly on the consumer spending front. A big driver of households’ buying power – wage growth – hasn’t kept pace with the downtrend in the unemployment rate lately. But the ongoing drop in oil prices and the associated downtrend in gasoline prices holds the promise of giving households some extra spending flexibility.
Looking at this report from the Fed angle, I don’t think it moves the needle much. It runs counter to the recent soft August jobs report, which many discounted as not reflective of real ground realities. What all of this means is that the U.S. economy is steadily improving, which frees up the Fed to start moving towards raising interest rates after ending the QE program next month. Many expect that next week’s FOMC meeting and the Chairwoman’s press event will drop hints to that end. We will see if that happens, but the steady rise in benchmark treasury yields in recent days is a reflection of such expectations in the market.
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