Soft Retail Sales Weigh on Stock Prices

Stocks had been enjoying a solid rebound in mid-February, but weaker than expected US retail sales could be a sign that economic growth is slowing. Economists are torn as to whether the soft January retail sales figure were a function of the government shutdown. It’s unclear, but it’s a negative data point which has the Federal Reserve contemplating the end of the normalization process. Softer than expected inflation figures should give the Fed room to maneuver.

Retail Sales Came in Worse than Expected

US Retail Sales were reported weaker than expected putting a gloom on Valentine’s Day. Retail sales dropped 1.2% in December, according to the Commerce Department. It’s the largest drop since September 2009, which was the tail end of the great recession. Expectations were for a flat reading. The November headline number was revised lower to 0.1% from 0.2%. Gasoline sales tumbled 5.1% which was the driving factor. Department stores dropped 3.3%.

The core retail sales which excludes automobiles, gasoline, building materials and food services, dropped 1.7% last month after an upwardly revised 1.0% surge in November. Overall the numbers where much softer than expected, which comes just a week before the beginning of the retail earnings season.

The Fed Takes Notice

Federal Reserve Governor Lael Brainard, in an interview on CNBC said she’s growing more concerned about economic growth. She said that she believes that the Fed will stop the-unwind of its balance sheet sometime this year. She is the first of the Fed governors to say that she believe the-unwind should have a time line. She took notice of the softer than expected retail sales, and said it was only one data point but it was one to watch carefully.

Brainard was asked about the Fed current policy stance specifically as it related to the term “patient. She said “I think we’re in a good place today. Brainard also said that I’m comfortable waiting and learning. The Fed increased interest rates at its December meeting but somewhat reversed course during its late January meeting. This now makes sense given the weaker than expected retail sales.

Inflation Remains Tame

The Fed will have room to maneuver as inflation remains tame. The Labor Department reported that U.S. consumer prices were unchanged for a third straight month in January. Lower gasoline prices which tended retail sales also capped inflation. The decline in gasoline prices was somewhat offset by higher food prices.

CPI rose 1.6% year over year which was the smallest gain since June 2017. The CPI increased 1.9% on a year-on-year basis in December. Excluding food and energy CPI gained 0.2%, rising by the same margin for a fifth straight month. On a year over year basis in January core CPI rose 2.2% for a third straight month. Expectations had forecast the CPI edging up 0.1% in January and the core CPI rising 0.2%.