Expectations of high US re­tail sales tem­pered de­spite ram­pant econ­omy

Financial Mirror (Cyprus) - - FRONT PAGE -

Lead­ing into the fi­nal week of Novem­ber, the US econ­omy showed plenty of bullish­ness. The S&P 500 ex­pe­ri­enced its strong­est week of the year af­ter anx­i­ety about Fed in­ter­e­strate hikes abated. By Fri­day, in­vestor sen­ti­ment calmed af­ter of­fi­cials from the Fed­eral Re­serve in­ti­mated that the econ­omy was on track for a De­cem­ber rate hike. Typ­i­cally, mar­ket an­a­lysts tend to es­chew un­cer­tainty and it is pre­cisely that which leads to high volatil­ity vis-a-vis sell­offs in the eq­ui­ties mar­kets.

As it stands, the S&P 500 in­dex ended the week on a high note, gain­ing 3.3%.

Geopo­lit­i­cal un­cer­tainty was high on the agenda af­ter the ter­ror­ist at­tacks in Paris, but that soon sub­sided. There were re­newed calls by the ECB to push for mon­e­tary stim­u­lus if re­quired. Al­ready, the ECB has in­jected EUR 1.1 trln into the Eu­ro­zone, and ECB Pres­i­dent Mario Draghi has in­ti­mated that he is fully pre­pared to push for ad­di­tional quan­ti­ta­tive eas­ing at the next meet­ing of the ECB in De­cem­ber.

Among oth­ers, Draghi has sug­gested that all op­tions are on the ta­ble in­clud­ing a change to quan­ti­ta­tive eas­ing (QE) pol­icy to fur­ther stim­u­late the Euro­pean econ­omy, and he has also sug­gested slash­ing the de­posit rates.

Eu­ro­zone con­sumer sen­ti­ment has im­proved ac­cord­ing to the Euro­pean Com­mis­sion’s flash es­ti­mate. The im­prove­ment was re­flected in an in­crease from -7.6 to -6 in Oc­to­ber. In the Euro­pean Union over­all, con­sumer sen­ti­ment in­creased to -4.4 for a gain of 1.3 points.

The ECB will be meet­ing on De­cem­ber 3, and an­a­lysts are ex­pect­ing Mario Draghi to come good on his pledge to do what­ever is re­quired to save the Euro from go­ing into fur­ther de­cline. This will be done in a mul­ti­step process which in­cludes en­sur­ing that the in­fla­tion rate is in­creas­ing, un­em­ploy­ment is de­creas­ing and eco­nomic sta­bil­ity of the Eu­ro­zone as a whole im­proves. The re­cov­ery has been ex­cep­tion­ally slow, and eco­nomic an­a­lysts posit that the Eu­ro­zone would re­quire at least 31 quar­ters for out­put lev­els to reach pre-cri­sis lev­els. Draghi be­lieves that this process can be ini­ti­ated in 2016.

Through­out the year, there has been sig­nif­i­cant talk about the prospect of higher in­ter­est rates. The ex­pec­ta­tion and un­cer­tainty of a Fed rate hike has gen­er­ally been neg­a­tive for eq­uity mar­kets. On most ev­ery oc­ca­sion, eq­ui­ties plunged on the mere sug­ges­tion of an in­ter­est-rate hike.

How­ever, for the week end­ing Fri­day, Novem­ber 20, change was ev­i­dent. For the first time, eq­uity mar­kets ral­lied on the news that an in­ter­est-rate hike was likely within three weeks. This was re­vealed in the min­utes of the Fed meet­ing that was re­cently held. What this shows is deeper insight by mar­ket an­a­lysts and eq­uity traders. The fact of the mat­ter is that mar­ket par­tic­i­pants do not enjoy eco­nomic un­cer­tainty. All the back and forth about rais­ing in­ter­est rates and wait­ing for con­di­tions on the ground to be con­ducive to in­ter­est-rate hikes was desta­bil­is­ing to the mar­ket. Now that mar­ket play­ers understand that the US econ­omy is on track for a solid re­cov­ery, the re­al­ity of higher in­ter­est rates is start­ing to per­co­late. The par­a­digm shift in in­vestor be­hav­iour has taken many a mar­ket an­a­lyst by sur­prise, but with all the signs point­ing the di­rec­tion of a rate hike, even an­a­lysts have to ad­mit the in­evitable – it’s go­ing to hap­pen.

One of the broad­est in­dexes of over­all US eco­nomic per­for­mance is the S&P 500. It recorded a record high in May/June and plunged af­ter the CNY was de­val­ued in Au­gust. Since then, we have wit­nessed a sharp uptick in the S&P 500 in­dex, and it closed at 2089.17 re­cently. On Novem­ber 4, the S&P 500 plunged af­ter Janet Yellen spoke of an in­ter­est-rate hike in De­cem­ber. Since then, the S&P 500 in­dex has ral­lied. It ap­pears that the higher costs of bor­row­ing funds have not tem­pered expectations of con­tin­ued ro­bust­ness and eco­nomic growth in the US.

The up­com­ing hol­i­day sea­son is ex­pected to pro­vide US re­tail­ers with noth­ing less than solid growth. How­ever this is un­likely to be a bumper Christ­mas shop­ping sea­son, ac­cord­ing to many re­search an­a­lysts. For starters, the per­va­sive warm weather across the US is go­ing to put a dent in re­tail sales for win­ter ap­parel. Ac­cord­ing to the Na­tional Re­tail Fed­er­a­tion, Novem­ber/De­cem­ber sales are likely to in­crease to $630.5 bln (+3.7%), com­pared to 2014 growth of 4.1%. Brean Cap­i­tal an­a­lysts are also fore­cast­ing a dif­fi­cult hol­i­day shop­ping sea­son, but the gen­eral ex­pec­ta­tion is that Q4 2015 will not be the worst on record ei­ther.

Much the same sen­ti­ment is shared by con­sul­tants from Deloitte. They posit a re­tail sales in­crease of 3.5% - 4%, with US con­sumer spend­ing up­wards of $434 bln through­out the Novem­ber/De­cem­ber shop­ping sea­son. At the same time last year, Deloitte es­ti­mated re­tail sales growth at 5.2%.

The poorer-than-ex­pected re­tail sales growth fore­casts are some­what con­cern­ing given that crude oil prices have plunged in 2015, plac­ing sig­nif­i­cantly more dis­pos­able in­come in the hands of US con­sumers. It has been sug­gested that while many be­lieve that re­tail sales would pick up the slack with greater PDI, many US con­sumers are ac­tu­ally de­posit­ing their sav­ings in­stead of spend­ing them on re­tail goods. But with Black Fri­day of­fi­cially kick­ing off the hol­i­day shop­ping sea­son, fol­lowed by post-Thanks­giv­ing and the run-up to Christ­mas shop­ping, the US econ­omy is go­ing to go into surge mode soon. Ac­cord­ing to the LA County Eco­nomic De­vel­op­ment Cor­po­ra­tion Oc­to­ber re­tail sales in­creased by 0.1% from a month ago.

The uptick in gen­eral eco­nomic sen­ti­ment is pos­i­tive de­spite a de­crease in con­sumer con­fi­dence re­cently. The mar­kets have been im­pacted with all sorts of con­flict­ing re­tail data, some of which was pos­i­tive – Walmart – and some of which was neg­a­tive – Nord­strom and Macy’s.

Many an­a­lysts are some­what con­cerned about how a strong US econ­omy can be cou­pled with weak re­tail sales growth in the busiest shop­ping sea­son of the year. How­ever. ev­ery­thing should be viewed in per­spec­tive, es­pe­cially given global weak­ness in China, slack com­mod­ity prices, the prospect of a stronger USD and slow in­creases to real wages.

Of course the other is­sue – the big one – is per­sis­tently warm weather which is making it dif­fi­cult to sell sweaters, jack­ets and other win­ter ap­parel. Cloth­ing is ex­pected to be the most pop­u­lar hol­i­day gift with as many as 48% of con­sumers se­lect­ing ap­parel for this rea­son. What is also no­table at this time of year is that the prover­bial ‘must have’ cloth­ing items sim­ply do not ex­ist now. Global tem­per­a­tures have in­creased dra­mat­i­cally in 2015 – some are even say­ing it has been the hottest year on record yet. The post­pone­ment of sales of win­ter ap­parel has dented expectations for the re­tail sec­tor. For now, US cloth­ing re­tail­ers are adopt­ing a wait-and-see ap­proach and hold­ing off on win­ter ap­parel and fall ap­parel.

An­other in­ter­est­ing trend is that 47% of shop­pers will con­duct their busi­ness on­line while the re­main­ing 53% will be in-store.

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