No Near-Term Energy Relief, Real Retail Weakness

Last Wednesday, President Biden headed overseas with a stop in Israel and a visit to Saudi Arabia. The trip was a definitive four days, although the success of the trip remains up for debate. While some White House officials touted?“the opening of Saudi airspace to all, the ceasefire in Yemen, agreements on food security,”?the focus of the trip was oil and an apparent plea to Saudi leaders to increase production and help alleviate the global supply crunch. While the Biden administration was unable to secure a firm agreement, as Jared Berstein, White House economic adviser, pointed out on CNN’s State of the Union on Sunday, the Kingdom does reportedly plan to increase capacity to 13 million barrels per day by 2027.

The lackluster results of Biden’s trip overseas, and the market’s apparent need for a?near-term?solution to increase global energy supply, sent oil costs promptly higher. Brent crude rose 2.1% on Friday to $101.16, ending the week down, however, off 5.5%. Since the start of the year, oil prices are up 30%.

This morning, oil prices are up 4.01%, trading at $105.25 a barrel as of 9:16 a.m. ET.

Equities?are trading higher with the Dow up 0.56% at 31,464.08 as of 10:19 a.m. ET.

Yields?are also trading higher with the 10-year UST yield up 6bps at 2.98% as of 10:20 a.m. ET.

Speaking of rising prices, recall last week, the PPI rose 1.1% in June, more than the 0.8% gain expected and following a 0.9% increase in May. Year-over-year, producer prices rose 11.3% in June following a 10.9% rise in May, and the largest increase in three months.

Food prices rose 0.1%, and energy prices jumped 10.0% in June. Excluding food and energy costs, the core PPI rose 0.4%, less than the 0.5% increase expected, and following a 0.6% gain in May. Year-over-year, the core PPI increased 8.2% in June, a seven-month low.

Additionally, last week, the CPI rose 1.3% in June, surpassing the 1.1% gain expected and following a 1.0% rise in May. Year-over-year, consumer prices rose 9.1%, up from the 8.6% pace reported the month prior, and the largest annual increase since November 1981.

Food prices rose 1.0%, and energy prices jumped 7.5% in June, following a 3.9% increase in May. Excluding food and energy costs, the core CPI rose 0.7%, more than the 0.5% rise expected according to?Bloomberg, and following a 0.6% increase in May.

Year-over-year, the core CPI increased 5.9%, down from 6.0% in May and further below the near-term peak of 6.5% reported in March.

Bottom Line:?Inflation remains?"too high,"?to say the least, with consumer and producer prices up over 9% and 11%, respectively. While price pressures appear to be somewhat concentrated in higher food and commodity costs, with the core offering some signs of relief, for the average American these are arguably the two most important categories of non-discretionary purchases that households make month to month. Thus, while?core?inflation appears to have peaked, this offers little comfort to Americans still filling up their car with over $4.50 a gallon of gasoline and struggling to put food on the table.?

For the Fed, the continued backup in prices all but solidifies an additional 75bp hike – or more – next week, and perhaps an even more aggressive pathway going forward. With headline prices at the highest level in more than four decades, given the Committee has been clear a marked decline in inflation is the prerequisite for a more benign approach to policy, it’s hard to imagine the Fed taking a softer stance on July 27th?or thereafter should price pressures remain elevated, particularly given increased market expectations – pressure – for the Fed to make a larger move.

According to the CME FedWatch tool, the probability of a 75bp move is priced in at 69.1%, with expectations for a 100bp move priced in at 30.9%, down, however, from 75% earlier last week.

On Friday, retail sales rose 1.0% in June, a tenth of a percentage point more than expected and the strongest pace in three months. May sales, meanwhile, were revised up from a 0.3% drop to a lesser 0.1% decline. Year-over-year, retail sales rose 8.4% in June, the most in four months.?

Car sales rose 0.8% in June following a 3.0% decline the month prior, while gasoline stations sales increased 3.6% following a 5.6% jump the month prior. Excluding autos, retail sales rose 1.0% in June and climbed 10.6% over the past 12 months, reflecting a reduction of higher costs as opposed to increased demand. Excluding autos?and?gasoline, retail sales rose 0.7% and increased 6.6% year-over-year.

In the details of the report, miscellaneous sales jumped 1.4%, eating and drinking sales climbed 1.0% in June, following a 0.9% increase in May, and non-store retailer sales rose 2.2%, the largest increase in a year. Also, sporting goods sales rose 0.8%, food and beverage sales gained 0.4%, and furniture sales increased 1.4% in June. On the weaker side, clothing sales fell 0.4%, health and personal care sales declined 0.1%, and building materials sales slipped 0.9% in June, the third consecutive month of decline. Also, general merchandise sales fell 0.2%, due to a 2.6% decline in department store sales.

Bottom Line:?A welcome gain in June consumer spending, suggesting shoppers have not completely pulled out from the market despite dwindling real income growth, heightened fears of recession, and of course, rapidly rising costs. That being said, while the headline increase taken alone appears solid or even robust by some metrics, following a 0.1% decline in May, the increased volatility in consumer spending habits month to month as shoppers markedly adjust the goods and services in their basket emphasizes the ongoing uncertainty in consumers’ assessment of current conditions and their future financial footing. Furthermore, retail sales are not adjusted for inflation. Thus, given a continued backup in prices, particularly energy costs, real retail spending remains deeply in the red, down 0.3% for the month and off 0.5% year-over-year.

This morning, the NAHB Housing Market Index dropped from 67 to a reading of 55 in July, more than the expected decline to 65 and the lowest reading since May 2020.

Tomorrow, housing starts are expected to rise 2.0%, while building permits are expected to decline 2.7% in June.

Later this week, on Wednesday, existing home sales are expected to fall 0.9% in June from 5.41m to 5.36m.

On Thursday, initial jobless claims are expected to decline from 244k to 240k in the week ending July 16.

Finally on Friday,?the S&P Global U.S. Manufacturing Index is expected to fall from 52.7 to a reading of 52.0 in July.

-Lindsey Piegza, Ph.D., Chief Economist