April Retail Sales Hints at Slowing Consumer

• Treasuries open the final trading day of the week rallying after reaching some key yield levels yesterday. The buying is a sign that investors continue to find value, and perhaps more importantly that foreign buyers remain in the game, which was a fear coming after the “Liberation Day” tariff announcement. Also, the latest inflation report (Import/Export prices) was released this morning and lower foreign airfare prices will feed into core PCE which will add confidence to the 0.1% MoM expectation for April core PCE.  Currently, the 10yr is yielding 4.40%, down 6bps on the day, while the 2yr is yielding 3.93%, down 4bps on the day.

 

• It’s only one month, but April’s Retail Sales Report did hint at some slowing in consumer spending which if it deepens will make the Fed’s job a little harder in maintaining an unchanged rate posture. Overall sales were up 0.1%, which narrowly beat the unchanged expectation, but fell well short of the 1.7% March gain and the so-called Control Group, which is a direct feed into GDP, fell -0.2% vs 0.5% in March. What’s more, in April 7 of the 13 categories saw month-over-month declines vs. just 1 of 13 in March. So, while it wasn’t dramatic there was some obvious slowing in spending in April. Investors and the Fed will be attentive to whether April is the start of a new trend in the consumer tightening their purse strings, or just a pause due to the tariff-inspired market volatility during the month.

 

• Keep in mind too, the caveat we always offer with the Retail Sales Report is it’s primarily a goods-based basket of items. While it includes some services, it’s not nearly as comprehensive as the Personal Income and Sales Report (which includes the PCE inflation series). That report will be released at month end. So, that fact alone argues against reading too much into yesterday’s report, but if the consumer is stepping back from the expensive European vacations and cruises the service sector may not provide the spending splurge that it did for much of 2024. Anecdotal reports of reduced high-ticket travel/vacation bookings are out there, but we’ll have to see if it shows in the hard data in April.

 

• Also out yesterday was the April PPI report which surprised to the downside with all month-over-month measures declining and that has analysts revisiting their core PCE forecasts for April. Prior to the PPI numbers, estimates were coalescing around a 0.2% MoM increase but the drop in April PPI has lowered core PCE estimates to a “high” 0.1%. In any event, it looks like April PCE will confirm the cooler inflation numbers that we saw in CPI earlier this week. If the Fed is faced with a slowing economy/consumer, a softening in inflation allows them more latitude to cut if it is deemed warranted from the full employment mandate.

 

• One more inflation report for April was released this morning with the Import/Export Price Index. Import prices rose 0.1% on the month, higher than the -0.3%expectation, while imports less petroleum increased 0.4% vs. -0.1% in March. While everyone is waiting on bigger tariff-influenced moves in import prices this report reminds us that it may be more in fits and starts then in a wave of higher prices. Recall the surge in March imports to front-run tariffs; we’ll probably see another episode of that with the 90-day delay in the max China tariff. So, rather than waiting for the exorable march higher in prices, it’s likely to be more isolated increases that may be offset by dips in unaffected areas (like oil this month). Meanwhile, export prices rose 0.1%, higher than the -0.5% expected dip, and higher than the 0.0% March reading. One item of note, foreign airfares fell 3.0% during April and that will feed into core PCE which will work well with the PPI-influenced dip to 0.1% expected. If that comes to pass, it will complete the painting of a benign inflation picture for April, despite some spot increases in tariff-influenced segments.

 

• Later this morning (10am ET), the preliminary University of Michigan Sentiment Survey for May will be released with most eyes on the pair of inflation projections which have spiked in recent months. The April report saw the 1Yr Inflation Expectation rise to 6.5% while the 5-10Yr expectation rose slightly less to 4.4% (still the highest since 1991). The Fed is big on wanting to see longer-term inflation projections “well anchored” such that higher expectations don’t become a self-fulfilling outcome. That being said, some recent Fed Speak did address the surge in inflation expectations in the Michigan series that were not confirmed by other surveys. Thus, there is hesitancy on the part of the Fed with this part of the survey. Reading between the lines, we think if the Fed were inclined to cut rates, they wouldn’t let these inflation expectations stand in their way.

 

• Finally, the weekly jobless claims numbers were another case of “not much to see here.” Claims for the week ending May 10^th matched the prior week at 229 thousand. The four-week moving average moved up to 230,500, an increase of 3,250 from the prior week. Meanwhile, continuing claims for the week ending May 3, were 1.881 million, an increase of 9,000 from the prior week. In summary, the activity around jobless claims remains well behaved and has yet to reflect a significant uptick in layoffs which will play well with the Fed’s patient pause approach, but again, if the consumer is tightening their spending budget, can an increase be far behind? This is probably a question that won’t be answered until we’re well into the summer months.

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Initial Jobless Claims Continues to Show Little Pick-Up in Layoffs

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Same Story with Continuing Claims – All Quiet on the Layoff Front

 

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Meanwhile, 7 of 13 Retail Sales Categories in the Red in April

Source: Bloomberg