Wednesday’s release of the monthly retail sales number—typically a highly watched economic report—could be even more meaningful than usual. This well-timed measure of consumer confidence could offer key market insights for Federal Reserve interest rate decisions coming up at the end of October and in December. It could also reflect potentially important trends for retailers as investors dig in for a barrage of Q3 earnings releases.
Consumer spending is often a key driver of economic growth but because the latest U.S. employment report showed a few cracks in labor market strength, industry analysts—and the Fed—will likely scour September retail sales data to see if the economy’s forward momentum can continue, or if the consumer is pulling back.
What Did Retail Sales Say?
Sales at U.S. retailers rose just 0.1% in September after no change in August, government data issued Wednesday morning showed. Auto sales were strong once again, jumping 1.7%. And sales at gas stations fell as expected, down 3.2%, because of lower prices at the pump. Yet total sales excluding autos and gas were flat. So-called control group sales that factor into GDP rose a tame 0.2%.
A number of firms, including Briefing.com, S&P Capital IQ, and Credit Suisse have said they are still banking on a rate hike at the Federal Reserve's December meeting. Of course that was before the latest retail snapshot.
Certainly some market indicators reflect uncertainty among market participants.
“Fed funds futures pricing indicates that a 30% probability of a Fed interest rate hike in December has been priced into that market," says JJ Kinahan, chief market strategist at TD Ameritrade.
Action in the Aisles?
Kinahan says it can be important for armchair economists to compare the results of two or more retailers. That way, investors get an idea of the health of retailers whose consumer sweet spot is discount and others that target luxury-goods buyers. For instance, a cross-section might include Nordstrom (JWN), Wal-Mart (WMT), and Target (TGT).
Traders and longer-term investors can set an alert on their thinkorswim® calendars for upcoming bellwether retail sector earnings releases (see figure 1).
For investors looking to glean the most out of this week's report, here’s a cheat sheet for potential Fed and market clues.
A stronger-than-expected retail sales number:
- The Fed. "The market will look at it as a data point that might influence the Fed to proceed with a rate hike before the end of the year," says Patrick O'Hare, chief market analyst at Briefing.com. Note that Briefing.com forecasted a quarter-point rate hike at the December Fed meeting. "We think they are likely to raise rates before the end of the year essentially to project an air of confidence in the potential for the U.S. economy going forward," O'Hare says.
- Retailer earnings. Individual company names could be better positioned to beat earnings, especially on the revenue numbers, says Kinahan.
A weaker-than-expected retail sales number:
- The Fed. "The market will interpret a weaker-than-expected retail sales report as yet another data point that will likely support the argument the Fed funds rate will not be raised before the end of the year," says O'Hare.
- Retailer earnings. "Be very careful about speculating on the upside on names in the retail sector, even if it’s a company that you believe is doing well. Some investors may be hesitant to take on long positions in individual stocks that rely heavily on retail sales whims," says Kinahan.