May 12, 2005
FROM PRUDENCE TO PROFLIGACY IN 30 DAYS
If you're not confused when it comes to figuring out which way the economic winds are blowing, today's retail sales report for April threatens to advance the cause of puzzlement.
For those who haven't been following the soap opera otherwise known as the American economy, a quick recap is in order. When we last left the dismal science, hope was in the air after the news that the trade deficit unexpectedly narrowed in March. Although exports rose in March, the decline in imports was no less important in paring the gap. Alas, that paring was largely due to a pullback in consumer spending, which of course raises the issue of whether the "solution" to the trade deficit is worse than the disease.
But while consumers pulled back on time spent in malls and the lots of car dealers, their prudence in March gave way to profligacy in April, according to today's retail sales estimates for last month. Advance retail sales jumped 1.4% last month, up from a sluggish 0.3% rise in March, the Census Bureau reports. That's twice the rate of increase that economists were predicting, and is the fastest monthly increase since last September's 1.8% rise. Comparing last month vs. a year earlier, retail sales were up 8.6%, or more than twice as fast the economy's pace of expansion in recent quarters.
Perhaps the April bounce-back can be explained by oil prices. Recall that in March, a barrel of crude was climbing on its way to a new all-time high. The momentum in energy prices that month arguably took a toll in consumer sentiment. But as April unfolded, oil prices began slipping in rapid fashion for a time, and presumably giving Joe Sixpack a fresh injection of consumption fever, and giving our hero an excuse for reverting to form.
No matter the analysis, the fact that retail sales climbed sharply in April raises fears anew that the Federal Reserve will continue raising interest rates when it meets again on such matters on June 30. "The issue for the market is that it shows the economy remains quite vibrant and it raises the specter of further rate increases by the Fed," Frank Husic, chief investment officer of Husic Capital Management in San Francisco, tells Bloomberg News.
Fair enough. But then why did the yield on the 10-year Treasury Note slip today? If the bond bulls are worried about the Fed, they showed no fear in today's trading session. The 10-year yield slipped to its lowest since May 5 by the session's close.
While you're deconstructing the minds of bond traders, take note too that the stock market tumbled today despite the bright news on retail sales. Among the catalysts for the selling in equities: Wal-Mart Stores Inc. disappointed the Street ever so slightly by reporting first-quarter earnings per share of 55 cents vs. the consensus estimate of 56 cents. No matter that 55 cents was up 10% on the year-earlier report—not bad for one of the largest companies in the world that's still growing twice as fast as reported first-quarter GDP. But Mr. Market has no patience these days for even the smallest of frustrations, and so traders sold Wal-Mart first and asked questions later.
What's more, the price of a barrel of crude continued tumbling today, dropping more than 3% to close under $49 a barrel in New York futures trading. Lower energy prices, in theory, should boost equity traders' spirits and worry the fixed-income set in that lower fuel costs fosters economic activity, the monster that the bond market fears most. Instead, the opposite unfolded: oil dropped and so did yields. So much for applying economic logic to the pricing of securities.
Tomorrow brings news of import prices for April, thereby delivering another opportunity to misinterpret the numbers, in this case a measure of inflationary pressures, or the lack thereof blowing into the U.S. economy from abroad.
Posted by jp at May 12, 2005 5:20 PM
Given the impact of Easter being a month earlier year these is a good chance that season adjustment is significantly overstating the strength of April retail sales and employment.
Posted by: spencer at May 14, 2005 2:29 PM