US data continues to make the case for the Fed's hiking cycle to end

Today's softer retail sales and PPI numbers have weakened further the Fed's argument that a further rise in interest rates might yet be needed

By Stuart Cole | @Stuart Cole | 15 November 2023


Today’s retail sales numbers from the US will be read by the Fed as a hopeful sign that, at long last, US consumer spending is finally starting to weaken. The strength of domestic demand has very much been a bugbear for the Fed, buoying growth and the economy in general while it has been trying to slow activity down via the monetary tightening it has delivered. Even though the spending splurges seen at the start of this year and over the summer period were unlikely to be sustained, the Fed will nonetheless be hoping that today’s numbers signal that we are finally now seeing a material downshift in consumer spending. However, this does not mean that today's numbers prelude a collapse in spending any time soon. Household balance sheets remain far from fragile, largely as a result of the excess savings built up over the pandemic period, meaning that the Fed will want to see a consecutive run of softer numbers before it will be comfortable concluding that spending is on a more structural softer footing.

The fact that headline retail sales came in slightly stronger than expected (-0.1% against an expected -0.3%) is largely attributable to robust sales of petrol, which held up better than expected despite the 5.9% fall in prices which was expected to have a much larger impact on the total value of fuel sales. Working in the other direction were vehicle sales, which fell by 1.1%, a bigger drop than expected.

Overall, therefore, as far as the Fed is concerned, today’s numbers will be viewed with a sense of cautious optimism. The previoius strength seen in consumer spending was required to subside before the FOMC would have been prepared to step back from its hawkish stance, and today potentially delivered the first real sign of this. But at the same time, a collapse in spending would not have been welcomed either, given the significant headwind this would present to overall GDP, and today's numbers are not suggesting we will see such a collapse.

Separately, the PPI numbers released at the same time will have reinforced market sentiment that inflationary pressures now appear to be on a sustained path lower, obviating the need for any further tightening in monetary policy. The headline reading was very much driven lower by falling energy prices, which were down 7.4%. But even more encouragingly, Trade Services, a key component of Core PPI, responsible for around 25% of the index, saw a 0.8% fall in retail margins, the largest monthly drop for nearly four years. Although margins are still higher than they were pre-pandemic, the year-on-year rate of increase is now largely flat and it can be expected that outright falls will now be seen going forward. Much of the sluggishness in this reversal has been caused by the strength of consumer demand which has allowed retailers to pass on inflated prices: today’s retail sales numbers suggest this pricing power is disappearing quickly.