Cautious Purchases

Retail sales in June disappointed as they were well below market expectations. Improvement in the labour market and rising household wealth did not spread fully in consumption data in Q2 among uncertainties over a tightening of financial conditions. Ben Bernanke’s testimony to Congress should help stabilise yields.

Retail sales were up 0.4% in June, well below expectations of a 0.8% rise, while May data were slightly revised down at 0.5% (from 0.6%). June gains essentially came from motor vehicles.

Excluding volatile items (cars), price-sensitive sectors (gas) and building materials (which are part of residential investment and not part of private consumption in US national accounts), retail sales were only up 0.2% in June, after 0.5% in May.

Improvements in the labour market and rising household wealth did not spread fully into consumption data, as uncertainties regarding the strength of the recovery and tighter financial conditions, lead to some rebuilding in savings. Consumers remained cautious. In Q2 retail sales were up 0.8% QoQ after 1.0% in Q1 and 1.4% in Q4 2012.

Following the minutes of the June FOMC and Ben Bernanke’s speech at the NBER conference, the Fed Chairman is to deliver its semi-annual monetary policy report to Congress this week (Wednesday and Thursday). This should be a new occasion to emphasise the data-dependant evolution of the Federal Reserve policymaking and the special attention paid to the weakness in inflation.

To this extent, CPI Inflation for June, released tomorrow, will be closely watched. We expect acceleration in CPI in line with rising energy prices as core inflation should have remained stable, at 1.7%. Acceleration in core inflation would only come in the second half of the year, in line with the expected acceleration in GDP growth. The very first signs of acceleration in consumer prices could be seen at the early stage of processing. Excluding food and energy, the PPI index was up 0.2% m/m.

BY Thibault MERCIER

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