International Uncertainty; Domestic Consumer Shows Ongoing Strength

International uncertainty continues to wreak havoc on market expectations, as well as create further uncertainty and upside risks to inflation. The latest attack on Israel by Iran is no exception, as investors attempt to gauge the political impact, fallout and global political and future policy implications.?

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In the immediate aftermath of the attack oil spiked. This morning, however, crude is off of earlier peak levels nearer $88, now trading at $84.92 as of 8:24 a.m. ET. Longer-term yields, meanwhile, are still elevated with the 10-year up 6bps from Friday’s close, currently trading at 4.58% as of 8:24 a.m. ET.??

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According to Bloomberg reports, Iran has committed that there will?be no further attacks as long as Israel doesn’t respond “aggressively.” Israel’s Prime Minister, Benjamin Netanyahu, however has warned, “whoever strikes Israel, we will strike him.”

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Back in the U.S., the latest look at the American consumer showed ongoing strength for the second consecutive month after a dip in January. This morning, retail sales rose 0.7% in March, surpassing?the 0.4% rise expected and following an upwardly revised 0.9% gain the month prior. Year-over-year, retail sales rose 4.0% in March, the most in three months.

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Car sales fell 0.7% in March following a 2.5% increase the month prior, and gasoline stations sales increased 2.1%. Excluding autos, retail sales rose 1.1% in March and climbed 4.3% over the past 12 months. Excluding autos and gasoline, retail sales rose 1.0% and increased 4.9% year-over-year. Finally, excluding food, autos, building materials and gasoline station sales, control group sales gained 1.1% in March and rose 5.2% over the past 12 months.

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In the details of the report, non-store retailer sales gained 2.7%, miscellaneous sales rose 2.1%, and general merchandise sales increased 1.1%, despite a 1.1% decline in department store sales. Also, building materials sales increased 0.7%, food and beverage sales climbed 0.5%, and eating and drinking sales increased 0.4% in March as did health and personal care sales. On the other hand, furniture sales fell 0.3%, electronics sales declined 1.2%, clothing sales decreased 1.6%, and sporting goods sales declined 1.8% at the end of the first quarter.

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Bottom Line: Robust retail spending in February and March reinforces the thesis of an ongoing resilient consumer and further complicates the outlook for monetary policy. Of course, while momentum in spending remains positive, it has slowed from earlier peak levels, suggesting a prolonged position on the sidelines may be the most appropriate approach to rates. That being said, with growth accelerating beyond earlier forecasts going into year-end, ongoing strength in demand also calls into question whether or not the Fed has done enough to slow the economy, let alone break the consumer to ensure a return to stable prices. In other words, with such robust activity, coupled with still elevated – and rising – inflation, additional rate hikes, while still unlikely at this point, are at least re-entering the conversation.?

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Also this morning, the Empire Manufacturing Index rose from a reading of -20.9 to a reading of -14.3 in April, a two-month high albeit the fifth consecutive month of a negative print. According to the median forecast, the index was expected to rise to -5.2 at the start of the second quarter.

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In the details of the report, prices paid rose from five points to 33.7, while prices received decreased from 17.8 to 16.9 in April, a three-month low. Additionally, new orders rose one point to a reading of -16.2, the number of employees increased by two points to -5.1, averaging -5.4 over the past 6 months, and inventories gained from -12.9 to +3.4, a five-month high. On the other hand, the six-month general business conditions index declined from 21.6 to 16.7 in April, a four-month low.

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Later this morning, business inventories are expected to rise 0.4% in February following no change the month prior, and the NAHB Housing Market Index is expected to remain unchanged at a reading of 51 in April for the second consecutive month.

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Tomorrow, housing starts are expected to decline 2.7%, and building permits are expected to fall 0.9% in March.?

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Later in the week, on Wednesday, weekly mortgage applications will be released.

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On Thursday, weekly jobless claims, along with the Philly Fed Business Outlook Index, and the March Leading Index. Also, we have more housing data with March existing home sales. Last month, existing home sales unexpectedly jumped 9.5% to a 4.4M unit pace, the highest level in a year. Year-over-year, however, existing home sales fell 3.3% in February, the weakest annual pace in two months and marking the 31st consecutive month of decline. This month, existing home sales are expected to extend that decline, dropping 5.1% in March to a 4.16M unit pace, potentially declining 4.4% year-over-year.?

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Finally, on Friday, the economic calendar is empty.

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On the heels of a surprising uptick in inflation last week, this week there are a number of Fed officials slated to take the stage including Dallas Fed President Lorie Logan, San Francisco Fed President Mary Daly, Governor Bowman, and Atlanta’s Bostic. Investors will be anxious to hear any indications of a change in expectations for rates given the recent backup in price pressures. Finally, also from the Fed, on Wednesday, the latest Beige Book will be released.?

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-Lindsey Piegza, Ph.D., Chief Economist

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