That the US is in the phase of slowing growth was evident again today with the release of retail sales for September. Core retail sales (control group) fell 0.2% m/m, much weaker than consensus at +0.4% m/m. Headline sales fell 0.3% m/m (consensus 0.1% m/m).
After a period of very strong retail sales, we now see moderation. This is a quite normal pattern in the US as can be seen in the charts below. However, it creates fears that the US is slowing more than expected and that the US is ‘falling down’ to the rest of the world rather than the rest of the world catching up with the US. As the US has been seen as the last pillar of strength in the global economy it adds to concerns over the global economy.
The weakening in retail sales will likely also translate into a further decline in ISM in coming months. ISM reached very high levels over the summer but fell for the first time in September. That the ISM could fall further was supported by today’s Empire index, which fell quite sharply in October to 6.17 (consensus 20.25) from 27.54.
We have highlighted for some time that the US surprise index had reached high levels and should come down given the very strong levels the US economy reached over the summer. It is only natural that US growth moderates. But as mentioned as usual it creates fears when the US hits a ‘soft patch’ and even more so when the rest of the world is looking weak.
Looking ahead, we expected growth to moderate further and the surprise index to continue down. However, the sharp decline in oil prices and overall good US fundamentals supports a still positive picture in the medium term.
For now, though, it adds to the risk off picture and downward pressure on bond yields. This environment could very well last for the rest of the year.
For the Fed it suggests that all talk of timing of rate hike is pushed to the sidelines for now and focus will be on whether to add purchases again or not. We don’t expect the economy to be weak enough for the Fed to go down this path. But it may very well be the market theme for a while.
After a period of very strong retail sales, we now see moderation. This is a quite normal pattern in the US as can be seen in the charts below. However, it creates fears that the US is slowing more than expected and that the US is ‘falling down’ to the rest of the world rather than the rest of the world catching up with the US. As the US has been seen as the last pillar of strength in the global economy it adds to concerns over the global economy.
The weakening in retail sales will likely also translate into a further decline in ISM in coming months. ISM reached very high levels over the summer but fell for the first time in September. That the ISM could fall further was supported by today’s Empire index, which fell quite sharply in October to 6.17 (consensus 20.25) from 27.54.
We have highlighted for some time that the US surprise index had reached high levels and should come down given the very strong levels the US economy reached over the summer. It is only natural that US growth moderates. But as mentioned as usual it creates fears when the US hits a ‘soft patch’ and even more so when the rest of the world is looking weak.
Looking ahead, we expected growth to moderate further and the surprise index to continue down. However, the sharp decline in oil prices and overall good US fundamentals supports a still positive picture in the medium term.
For now, though, it adds to the risk off picture and downward pressure on bond yields. This environment could very well last for the rest of the year.
For the Fed it suggests that all talk of timing of rate hike is pushed to the sidelines for now and focus will be on whether to add purchases again or not. We don’t expect the economy to be weak enough for the Fed to go down this path. But it may very well be the market theme for a while.
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