A Closer Look into the September Retail Sales Report | Episode 060 | 10-17-23

Megan Horneman shares her insight on the market reaction to the September retail sales report. The events causing this reaction are the increase in gasoline station sales, end-of-summer internet spending, and other critical factors. Despite the positive retail sales data, the equity markets remained relatively flat, but there was significant movement in the fixed-income market. She mentions unseen aspects such as the lack of inflation adjustment and the implications of economic factors not included in the report, like the resumption of student loan payments and a dip in consumer confidence in October. Megan also discusses the heightened likelihood of a Fed rate hike before year-end and its potential effects on bond yields and prices. 

Hello, I'm Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors. We're coming to you today with our regular market segment of Markets with Megan, and we're going to talk about the September retail sales report that we got today. There's really no other way to put this except this is a great report. When you look at retail sales, it was driven primarily by the increase in gasoline station sales. That's not surprising, given the increase in gasoline prices. But when you strip that out and you look at other indicators like excluding gas, excluding autos, excluding building materials, all of these numbers came out very solid. So no other way to put it, but a really good report. Let's dig into it a little bit. When you look at the underlying factors in the report, there was an increase in auto sales, health and personal care, restaurants and then internet spending a pretty big jump in internet spending, which we think can be attributed to some of those end of summer sales as companies try and clear out inventory ahead of the end of the year.

Now, looking at this retail sales report, there's just a couple of things to remember. It's not an inflation adjusted number, but still outside of that. Taking that into consideration, we can't deny it was a very good report. This was for the month of September, so it's not reflecting the increase in the student loan payments that we're starting to see in the month of October. It's also not reflecting the pretty big downtrend we saw in consumer confidence in the beginning of October. Remember, consumer confidence and spending do tend to be hand in hand.

Now what does it mean in the markets? This is kind of a good news. It's not always good news in the markets story. The equity markets have been relatively flat today to a little bit higher, but where we've really seen the move has been in the fixed income market. We have the two year yield now at the highest level since 2006, at about a 5.2%. We have the 10 year yield now at the highest level since 2007,. And that's happened because now you've got the chance of a Fed rate hike before your end back on the table. This has been our base case scenario that the Fed would have to raise at least one more time before the end of this year, and this has got investors pricing that back into the market. So you're seeing bond yields rise, bond prices go down. This is something the Fed will take into consideration.

But we also looking into the fourth quarter. We just don't see it as a sustainable number. Way too many challenges for the consumer as we go into the fourth quarter. As I mentioned, the student loan repayments are back. We still have higher energy prices and we have consumer confidence that's turning back lower again. That's all we have today. If you have any questions or comments, please feel free to reach out to podcast at verdencecom dot come Thank you.