Stocks fell slightly today in response to a way stronger than expected retail sales report, released before the market opened this morning. The Dow and S&P endured moderate losses through noon while the Nasdaq Composite traded flat.
Retail sales rose 3% month-over-month (MoM) vs. 1.9% expected according to the Commerce Department. Year-over-year (YoY), retail sales were up 6.4%, matching yesterday’s headline Consumer Price Index (CPI) gain. It was a huge beat that only one bank (Bank of America) accurately predicted.
Every price category saw an increase for the first time since the pandemic started, causing many analysts to view the data as something that should only complicate the Fed’s fight against inflation.
“The monthly reports on industrial production, retail sales, and jobs were generally better than expected and point to a pickup in economic activity in early 2023 after a soft patch in late 2022. The Fed will read recent activity reports as supporting plans for additional interest rate increases in the first half of this year,” said Comerica chief economist Bill Adams.
But were retail sales really all that impressive? As with all January economic data, a massive seasonal adjustment was applied to retail sales to offset the December-to-January slump that occurs every year. This most recent adjustment was the biggest on record (and 2022’s adjustment was the largest ever before that) to the tune of $69 billion. That’s about 10% of the total $697 billion in retail sales reported last month.
With a seasonal adjustment that’s more in line with the pre-Covid adjustment, retail sales would have come much closer to matching the consensus estimate of +1.9% MoM (vs. +3.0% reported).
Nonetheless, this is the data the Fed has to go with. And, in nominal terms, +3.0% MoM retail sales is certainly a big gain. It’s possibly big enough to provoke additional rate hikes alongside a strong January jobs report.
The problem, however, is that the gain is entirely nominal; +6.4% YoY retail sales when adjusted for inflation (which was also +6.4% YoY) is +0.0% in real numbers.
That seems far less threatening to the Fed when it comes time for Powell to raise rates again.
“After a disappointing December, a jump in retail sales indicates that the lasting inflation we have experienced isn’t holding back the consumer,” wrote Mike Loewengart, Morgan Stanley’s head of portfolio management, in a note.
“Expect some volatility in the near-term as investors mull over the Fed’s next steps and what, if anything, could lead it to cut rates in the calendar year.”
But the real question that investors should be asking themselves about today’s data is this:
Can Powell use the January retail sales numbers to justify bringing the federal funds rate above the 2023 target of 5.1%?
The answer is yes, absolutely. Powell will have plenty of hawkish ammunition (if he needs it) for the next FOMC meeting after today’s blowout retail sales report and the enormous January jobs report “beat.”
And that’s yet another reason for bulls to feel nervous (add it to the list) at the top of a rally that just refuses to end.
