Samstag, 16. Mai 2015

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The Dollar, the U.S. bond market, and the European stock market have all recently become infected with a highly contagious disease. The source of this nasty fever appears to be coming from none other than the sleepy old German bond market.
The yield on 10-year German sovereign debt has spiked from below 0.1 percent in mid-April to 0.635 percent as of publishing. That's the kind of move you'd expect to see about once every six decades.

Consumer confidence may be strong but it still is not translating to strength for consumer spending. Retail sales were unchanged in April vs Econoday expectations for a 0.2 percent gain. Excluding autos, sales did rise but only barely at plus 0.1 and below expectations for 0.5 percent, while excluding both autos and gasoline, sales rose 0.2 percent vs expectations for a 0.4 percent gain.

The surprising part of the report isn't the weakness in motor vehicles, which was signaled by weak unit sales and which fell 0.4 percent in the month, but weakness in some of the core readings including department stores which fell a very steep 2.2 percent and electronics & appliances which fell 0.4 percent for a 7th straight decline. Both furniture and food & beverages also show declines.

Year-on-year rates show just how weak growth in the retail sector has been. Total retail sales are up only 0.9 percent year-on-year, down from 1.7 percent in March. This is the lowest rate since late 2009. Excluding motor vehicles, year-on-year sales are unchanged, again the lowest reading since late 2009. Ex-auto ex-gas, sales are up a respectable 3.4 percent but, compared to 3.9 percent in March, are going in the wrong direction.

April really was a soft month for the economy, not offering much punch at all following the depressed first quarter. The doves at the Fed seem to have the upper hand with employment growth no more than moderate, inflation still benign, and with retail sales stubbornly weak.

Recent History Of This Indicator
Retail sales have been flat this year and there isn't much bounce expected for April, seen up only 0.2 percent. Vehicles are expected to hold down sales with the ex-auto reading seen at a much healthier plus 0.5 percent. But this gain in part reflects strength for gasoline stations where prices popped higher in the month. Excluding both autos and gasoline, sales are expected to rise a respectable 0.4 percent.

Growth in e-commerce sales picked up in the first quarter, to 3.5 percent vs a downward revised 1.8 percent in the fourth quarter. Year-on-year, e-commerce growth rose to 14.5 percent which is up 5 tenths from the fourth quarter but well down from the 15.6 and 15.0 percent rates of the two prior quarters. Despite the slowing trend, e-commerce as a percentage of total retail sales continues to climb to records, up a strong 4 tenths to 7.0 percent.

Consumer confidence had been holding, as the FOMC assured us just a couple of weeks ago, at high levels, but perhaps less so now with the consumer sentiment index at 88.6 which is nearly 5 points below Econoday's low-side forecast. Both components show weakness with current conditions down 7.2 points to 99.8 and expectations down 7.3 points to 81.5. These are the lowest readings since October and November of last year.

At the same time that confidence is going down, inflation expectations, reflecting rising gasoline prices, are going up. Expectations 1-year out are up 3 tenths to 2.9 percent while expectations 5-years out are up 2 tenths to 2.8 percent. Despite the turn higher, however, these are still low levels.

The drop in current conditions hints at softness in this month's jobs market while the drop in expectations is a downgrade for the outlook on jobs. The hawks at the Fed have been anticipating, perhaps over anticipating, that strong consumer confidence levels would eventually translate to gains for retail sales. Retail sales have been flat along and now consumer confidence, based at least on today's consumer sentiment report, is moving backwards. 

The University of Michigan's Consumer Survey Center questions 500 households each month on their financial conditions and attitudes about the economy. Consumer sentiment is directly related to the strength of consumer spending. Consumer confidence and consumer sentiment are two ways of talking about consumer attitudes. Among economic reports, consumer sentiment refers to the Michigan survey while consumer confidence refers to The Conference Board's survey. Preliminary estimates for a month are released at mid-month. Final estimates for a month are released near the end of the month. 

Consumer sentiment is mainly affected by inflation and employment conditions. However, consumers are also impacted by current events such as bear & bull markets, geopolitical events such as war and terrorist attacks. Investors monitor consumer sentiment because it tends to have an impact on consumer spending over the long run (although not necessarily on a monthly basis.)

Industrial production is stalling, down 0.3 percent in April for a 5th straight monthly contraction. Factories are cutting back with capacity utilization down 4 tenths to 78.2 percent. And the manufacturing component, which has been flat to negative all year, is unchanged. All these readings are at or near the Econoday low-side forecasts. 

Among manufacturing subcomponents, consumer goods output fell 0.3 percent with business goods down 0.4 percent. Construction supplies rose only fractionally but at 0.1 percent the reading is the best all year (this a reminder of how weak construction and housing has been). A positive is a second strong month for auto output, up 1.3 percent on top of March's 4.3 percent surge, but whether output increases further will depend on auto sales which, in yesterday's retail sales report, turned lower in April.

The two other main components in today's report show even greater weakness with mining, hurt by oil & gas, at minus 0.8 percent for the 6th contraction in 7 months and utilities at minus 1.3 percent for a 2nd straight decline.

The industrial economy remains flat and is holding down what is supposed to be the economy's springtime bounce. The news from the factory sector, including this morning's Empire State report, won't be pulling forward expectations for the Fed's first rate hike.

Heiko Thieme