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Market Wire
Inflation, Retail Sales Hit Like a Hurricane

Karl Schamotta October 13, 2017

Retail sales and inflation rose aggressively in September, suggesting that disruptions associated with hurricanes Harvey and Irma are having a profound impact on spending patterns in the world’s largest economy. After leaving a trail of destruction across several southern states, the storms drove a surge in American spending as consumers restocked supplies and purchased construction materials, with receipts at building supply stores advancing 2.1 percent while gas stations recorded a 5.8 jump. Purchases at car dealers rose 3.6 percent, after falling 2.1 percent in August – helping to kick the overall headline number to a 1.6 percent gain. Overall retail sales grew at a rate not seen since March 2015.

With a large chunk of America’s energy infrastructure located in hurricane-hit areas, temporary bottlenecks in refined-products distribution lifted gasoline prices at the pump by 13.1 percent, and pushed the headline inflation number to a sharp 0.5 percent gain relative to the prior month (coming in at 2.2 percent annualized). With energy and food prices stripped out, the ‘core’ inflation measure rose a much more modest 0.1 percent month-to-month, up 1.7 percent relative to September last year. This followed yesterday’s much stronger-than-expected wholesale producer price number – which rose to 2.6 percent on an annualized basis, with gains also primarily generated through increases in food and energy prices.

The dollar is reacting positively, with increased 2018 interest rate expectations pushing it upward against its counterparts as we go to pixels. With a December hike now almost fully discounted, economic data continuing to strengthen, and President Trump expected to nominate a monetary policy skeptic to head the Federal Reserve, traders are positioning ahead of a slightly more hawkish tilt in the central bank’s reaction function next year.

Crude oil prices are also rising in a snappish manner today, with a climb in Chinese imports intersecting with mounting geopolitical tensions to push the front-month West Texas benchmark above $51.50 a barrel. According to government data released this morning, China bought an additional 1 million barrels a day in September, alleviating worries that a rebalancing in economic activity could weaken domestic demand. Traders also bought oil on the expectation that Donald Trump will impose additional sanctions or disavow the Iranian nuclear deal when he speaks this afternoon, raising the likelihood of future supply disruptions – and a potential reheating in the many proxy wars simmering across the Middle East. The Canadian dollar is staging a half-hearted rally in reaction – but NAFTA negotiations and interest rate uncertainties are acting to slow its gains.

Bottom Line: As expected, today’s inflation and retail sales data served to illustrate the positive secondary effects that natural disasters can have – but as Janet Yellen and others have suggested, storm-related price and employment pressures are unlikely to have a meaningful or long-lasting effect on the wider American economy. This suggests that market participants may be in danger of ascribing more meaning to the data than is appropriate – despite repeated warnings from economists. After staging a solid recovery over the past month, the dollar is nearing overstretched territory, particularly against the euro and pound sterling.

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