Upbeat Retail Sales Revives Thoughts of Taper Talk Next Week

Just when we thought it safe to conclude taper talks will not be a part of the September FOMC meeting along comes the August Retail Sales Report to bring it back front and center. The sales numbers were better-than-expected and that pressured Treasury prices lower on the assumption that the retail sales numbers could resurrect taper talks next week. We still think taper plans will be unveiled in November but it does add an element of intrigue back into next week’s meeting. We do take a deeper dive into the retail sales numbers in the following section where we try to take a bit of the shine off the report.

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Taking a Deeper Dive into the Retail Sales Numbers

Treasury prices softened yesterday after the August Retail Sales Report came in better-than-expected and pretty much across-the-board, at that.  Overall sales climbed 0.7% following a downwardly revised 1.8% decrease in July, while the control group (a direct feed into GDP) increased 2.5% versus a decline of –1.9% in July.  That is one reason the sales numbers for August easily beat expectations as July’s results were revised significantly lower making the month-to-month comparison much easier.


Source: Bloomberg

A couple other points to keep in mind about the Retail Sales Report is that it is heavily weighted towards the goods side of the economy and not so much in services. Those numbers come more from the Personal Income and Spending Report which won’t be out until October 1. If the delta variant kept some people from engaging in services, and that certainly seems to be the case with drops in air fares and lodging noted in the August CPI report, some of that potential weakness will not be picked up in the goods-heavy retail sales numbers.  Also, the report is not adjusted for inflation so price increases could possibly account for some of the bounce and not just a greater number of transactions. Taken altogether, however, it was a solid report and certainly doesn’t portray a consumer that has hunkered down and tied the purse strings.

But as the graph above shows, after the strong bounce early in the year, mostly owing to stimulus checks, sales gains have been more modest and that points to a more moderate pace of GDP growth as well. The latest Bloomberg consensus has third quarter GDP at  5.0% (quarter-over-quarter, annualized) compared to 6.6% in the second quarter. Meanwhile, the Atlanta Fed’s GDPNow forecast has GDP coming in a bit lower at 3.7% which is another reason Treasury yields have remained rangebound of late.

Confidence Measures Took a Beating in August, Will They Rebound in September?

Part of the concern about the consumer heading into the August retail sales numbers was the drop in confidence as shown in both the Conference Board’s Consumer Confidence measure and especially the decade-low print in the University of Michigan’s Sentiment Index for August. Later this morning the September University of Michigan Sentiment will be released with expectations of a small bounce from 70.3 to 72.0.  A small bounce but at least a floor may have been established in August. We shall soon see.


Source: Bloomberg

With delta variant cases surging across parts of the country in August, it was thought the sagging confidence measures may keep consumers at home, or at least keep them selective in their purchases.  That seemed to be the case with the August CPI numbers on Tuesday which showed a fall off in air fares, lodging, and other re-opening categories. Those re-opening categories (as defined by Bloomberg) combined to subtract –0.27% off the headline CPI number of 0.3% while non-reopening sectors rose 0.38%.

As mentioned in the previous section the retail sales numbers are more heavily weighted towards goods purchases and those obviously held up better during the month than perhaps the more service-oriented categories as noted above.  Ultimately, the confidence measures will have to turn north if a lasting and broad increase in spending is to be expected.

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.11 0.40 0.67 0.99 1.74 2.20
0.50 0.09 0.37 0.61 0.88 1.61 2.09
1.00 0.09 0.34 0.57 0.84 1.51 1.96
2.00 0.32 0.52 0.76 1.39 NA
3.00 0.71 1.33 NA
4.00 1.28 NA
5.00 1.24 NA
10.00 NA

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Published: 09/16/21 Author: Thomas R. Fitzgerald