Better than expected retail spending figures and a strong start to the Q3 earnings season lifted the S&P 500 to its third straight winning week. The third quarter earnings season kicked off in earnest this week with financial giants Goldman Sachs and JPMorgan leading banks to better than expected results as they set aside less for future credit losses and posted a notable rise in bond trading revenue. In other U.S. economic news, the Bureau of Labor Statistics reported consumer and producer price inflation remained modest. Overseas, the Chinese economy continued to show building momentum with strong exports and import figures for September. For the week, the S&P 500 added 0.20%.
Retail Sales Spending Crushes Estimates
Consumer spending remained strong in September despite a lack of additional stimulus aid out of Washington. U.S. retail sales rose 1.90%, crushing Dow Jones consensus estimates for a 0.70% gain. Excluding autos, retail sales climbed 1.50% for the month, which was also a notable increase over August’s 0.60% gain. The gains were broad-based, led by clothing and accessories and music and books which were higher by 11% and 5.70%, respectively. The rise in these categories points to stronger than expected back to school spending despite many students attending school remotely. Although markets remain concerned consumers will cut back on their holiday shopping this season, they may yet again prove the economists wrong. With less travelling, fewer large events, and more people avoiding crowded indoor places, they may opt to spend more online or on higher ticket items instead.
Inflation Remains Modest Amid Economic Slack
Consumer prices rose 0.20% in September, a slowdown from August’s 0.40% gain. A drop in energy, transportation, and apparel prices managed to more than offset the 6.70% gain in used car and truck prices. The pandemic has resulted in odd supply/demand imbalances in areas that normally would be more susceptible to recessionary pressures. The used car market is one of them, having tightened amid consumers’ shift away from mass transit due to social distancing concerns. Year-over-year (yoy) consumer price inflation remained modest, rising only 1.40%. Core consumer prices, which exclude food and energy, were also up mildly 1.70% yoy. Conversely, producer prices, which measure prices received by businesses, rose 0.40% in September. This was slightly higher than August’s 0.30% gain. September’s gain was fueled by a rise in hospitality and lodging costs, who saw their service expenses rise by 3.90%, while an increase in building materials, hardware, transportation, and medical care also contributed to the month’s gain. Despite the back to back monthly increase in producer prices, it is important to keep this in context since they were up a mere 0.40% from year ago levels. Core producer prices, which, here again, exclude the volatile food, energy, and trade services, were up 0.70% from year ago levels. Inflation has not been a concern in recent memory, and with most of the world’s economies operating in some form of altered pandemic mode, it means inflation is not likely to be an issue in the near term despite the amount of recent fiscal and monetary injection.
Strong Global Demand Leads China Exports Higher
Chinese factories continued to ramp up production as orders continued to pour in for medical equipment and work from home gear for the sixth straight month. Exports rose 9.90% yoy in September. That was their quickest pace in more than a year. Imports also rose during the month, up 13.20% from year ago levels. The strong rise reflects improving domestic demand and Beijing fulfilling its agricultural goods commitments under the Phase 1 trade deal it struck with Washington earlier this year as its imports from the U.S. soared 24.80% yoy. Overall, the strong export and import figures point to a robust recovery at hand and put China back on track to its pre-Covid GDP growth trajectory of between 5.00% and 6.00%.
Gains on Monday and Friday managed to offset midweek declines, allowing the S&P 500 to essentially finish flat for the week. The back and forth in the market mirrored investors’ sentiment as they grappled with data reflecting a surprisingly resilient economy amidst worries that we are seeing the front edge of the long-awaited second-wave in coronavirus cases with the autumn season increasingly moving people indoors and in closer proximity to one another. Consumers are technically still flush with cash with the personal savings rate standing at 14.10% as of August. This has been cut from the 33% savings rate seen in April just following the first-round of stimulus, but it is nearly double the 7-8% range averaged since the last recession. The issues for the market continue to be what they’ve been from the beginning of all this, however, with the market trying to assess the burn rate (i.e. rate at which the economy reopens) relative to the timing and magnitude of supplemental transfers (i.e. direct payments to consumers and businesses). The strong Q3 retail sales report was an unexpected surprise and while a new stimulus bill is likely on hold until after the election, markets remain optimistic that enough juice remains in the tank and that a new stimulus bill will be delivered just in time for consumers to hit their Black Friday deals.