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Retail Sales Power Higher – Decisively Reversing Q1 Weakness

Karl Schamotta May 15, 2018

American consumers increased spending in April for a second straight month, adding to evidence that economic growth is accelerating again after softness in the first quarter. Retail sales climbed 0.3 percent last month, following an even larger gain in March than originally estimated, according to numbers released by the Commerce Department this morning.

Markets had expected a 0.3 percent gain – and a downward revision in last month’s estimate. March sales were adjusted to show a 0.8 percent increase instead of 0.6 percent – decisively breaking a three-month decline.

Colder-than-normal weather conditions may have lowered overall receipts somewhat, but gains were widespread, with growth in categories from clothing to furniture. The headline 0.3-percent growth number remained intact once more-volatile auto and gasoline station sales were excluded.

These numbers were corroborated on Friday when the University of Michigan reported that its measure of consumer expectations had improved in May, rebounding from three months of weakness – to hit highs not seen since 2004.

In the ongoing tug-of-war between higher gasoline prices and tax cuts, stimulative fiscal policy is winning (so far).

The dollar is trading on a stronger footing, with this morning’s supportive retail sales data adding to earlier gains in fixed-income markets, helping to shift yield differentials in the currency’s favour. The benchmark 10-year Treasury yield has risen above the psychologically-important 3-percent threshold – and perhaps more importantly, the two-year yield is now trading above where the ten-year started in early January.

Fears of an escalation in trade tensions between the United States and China continue to fade after Donald Trump’s reversal of sanctions originally applied against ZTE. Under the national security ban, ZTE was not able to purchase products from American component suppliers – and its removal suggests that the two powers are moving toward a compromise on trade issues.

Bottom Line: After a nerve-jangling reversal, consumer sentiment seems to be on the mend – suggesting that economic growth will improve in the second quarter, while providing the impetus for gradual rate hikes from the Federal Reserve. The bears will eventually return to scare consumers (and the financial markets), but for now, Goldilocks is back.

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