Retail Sales Jump

This week, the two biggest economic reports both contained significant surprises, but in opposite directions. Stronger than expected consumer spending modestly outweighed lower than expected inflation, and mortgage rates ended the week a little higher.

Consumer spending accounts for over two-thirds of U.S. economic activity, so the retail sales data is a key indicator of growth. In August, retail sales surged 0.7% from July, which was far above the consensus for a decline of -0.8%, although the results for July were revised lower. Sales were an impressive 15% higher than a year ago.

Particular strength was seen in department store and furniture sales, while auto sales were weak, mostly due to a lack of inventory resulting from chip shortages. Investors have been growing increasingly concerned in recent months about the effect of the spread of Covid on consumer behavior, but this report suggests that there is plenty of firepower available for shopping during the key back to school season.

The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term trend. In August, Core CPI was 4.0% higher than a year ago, which was much less than expected, and down from an annual rate of increase of 4.5% in June, a level not seen since 1991. Fed officials and economists are divided about whether the recent spike in the annual inflation rate is mostly due to temporary factors caused by the pandemic or will last for a long time, and this report supports the former view.

Looking ahead, investors will closely watch Covid case counts around the world. Beyond that, the next Fed meeting will take place on Wednesday, and investors will be looking for guidance about the timing for changes in monetary policy. Housing Starts will be released on Tuesday. Existing Home Sales will come out on Wednesday and New Home Sales on Friday.