Note: I am travelling in Asia until April 24. Limited equipment and different time zones will limit the frequency and depth of my postings.
In Like a Lion, Out Like a Lion for March Retail Sales
Retail sales handily exceeded expectations, rising 0.7% in March, and excluding autos, sales rose 1.1%, the biggest monthly pop in over a year. The better-than-expected gains are even more remarkable given the sharp upward revisions to the February data. The initial 0.3% gain in retail sales ex-autos was doubled to 0.6% in the March release.
There were a few factors that could be lifting the sales figures starting with the timing of Easter. The earlier than usual timing of the holiday may have pulled some spending into March that in other years might have occurred in April. To the extent that this was at play we could anticipate some payback in April.
Another boost came from ecommerce. The 2.7% jump in online retail was the biggest gain for any category in March and also the largest sequential increase in 27 months. Amazon hosted a “Big Spring Sale” March 20-25. It is not uncommon for other retailers to run competing promotions concurrent with Amazon’s and that too may have been a factor underpinning the non-store category in March.
Source: U.S. Department of Commerce and Wells Fargo Economics
Sales growth was mixed elsewhere. Grocery stores (+0.5%) and restaurants (+0.4%) saw similar gains in sales last month, but over the past year, restaurants continue to outpace grocery sales by a wide margin exhibiting the only slow normalization in behavior.
Higher prices also boosted sales estimates. Gasoline sales saw a 2.1% pop in sales, but with the retail sales data reported nominally, or not adjusted for inflation, higher prices at the pump lifted these nominal sales figures last month. Previously released data on vehicle sales foreshadowed the 0.7% pullback in sales of motor vehicles and parts in March, and even as households face the highest financing rates in decades, vehicle sales remain decent—auto sales were up 2.8% at a year-ago rate in March.
The same can’t be said for housing-related demand. Sales at furniture and building material & supply stores remain weak. While that’s in part due to demand being pulled forward during the pandemic and less remodeling activity taking place today, it’s also indicative of the higher-rate environment. On a year-ago basis, furniture sales were down for 16 of the past 18 straight months, while building material sales have slid for a full year. (…)
To that end, broader control group sales (sales excluding restaurants, autos, gasoline and building materials) leaped 1.1% in March, which came on top of upward revisions to past month’s data as well. Control group sales feed into the Bureau of Economic Analysis’ calculation of real goods spending in GDP accounting, and today’s data present some decent upside risk to our estimate for broader real personal consumption expenditures to advance at a 2.3% annualized rate in Q1. Our calculation of inflation-adjusted control group sales rose at an annualized rate of 3.0% in Q1.
(…) This morning’s consumption data continue to tell us not to underestimate this consumer. That’s good for growth, but could be a problem for the Fed trying to cool inflation.
What about this lion? In truth, it’s been quite erratic lately and spending on goods has become detached from labor income growth.
This next chart shows MoM growth rates: strong sales through October, a weak year-end and a big bounce in February-March.
Ed Yardeni:
The US economy is still flying high. That’s because consumers didn’t get the recession memo. They keep spending because real disposable income is rising, more Americans are retiring and have the means to do so comfortably, and six million or more “newcomers” are consuming here rather than south of the border.
Lions are dangerous when at short range. Taking a few steps back for a better assessment, let’s look at quarterly sales trends: Q3’23: +7.0% annualized, Q4’23: +2.4% a.r., Q1’24: +0.2% a.r..
Is the lion falling asleep?
January was very weak, bad weather. February bounced back, good weather, but really only made up for January.
March? Did the early Easter and the Amazon sale create the illusion of strength?
This chart shows total sales less non-store retailers, MoM. March “store sales” rose 0.3% after 5 months when sales actually declined 0.5% in total. Seasonally adjusted “store sales” are 0.2% below their September 2023 level.
Same chart, quarterly: not a roaring lion, is it?
Total sales are actually only 0.6% above their September 2023 level.
I am not ready to go fully against the bullish lion watchers but I fail to see accelerating spending. Aggregate payrolls are rising 2.0-2.5% YoY in real terms, so is real spending.
As an iffy proxy for real excess savings, real deposits are back on trend. Spending should normalize.
China Home Sales Drought Persists With Little Recovery Sign
The value of new-home sales from the 100 biggest real estate companies slid about 46% from a year earlier to 358 billion yuan ($49.6 billion), following a 60% decline in February, according to preliminary data from China Real Estate Information Corp. (…)
Country Garden Holdings Co., once a powerhouse in the residential space, made a surprise announcement late Thursday that it will miss a deadline for reporting annual results. China Vanke Co., at one time the largest listed developer, said net income tumbled 46% last year, sliding more than analysts expected.
March is traditionally a quick period for home sales, surging 93% from February, but sales were still weaker than the monthly average in the third and fourth quarters of last year, according to CRIC.
Separate figures released Monday showed a mixed picture for home prices in China. Prices of new homes gained 0.27% in March, accelerating from 0.14% in February, China Index Holdings data showed. From a year earlier, they climbed 0.82%.
In the second-hand market, however, prices fell 0.56% from a month earlier and 4.8% on year, according to the report, which tracked values in 100 major cities. (…)
Property market weakness has prompted Fitch Ratings to downgrade the credit rating of some builders into junk territory, including Vanke and Longfor Group Holdings Ltd.
Fitch Ratings on Thursday also cut forecasts for the housing market, and now expects a 5%-10% fall in new home sales this year amid weaker home-buying demand. The ratings firm previously estimated a 0%-5% decline.
Apple Faces Worst iPhone Slump Since Covid as Rivals Rise Global smartphone market rebounded in first quarter, IDC says
Apple Inc.’s iPhone shipments slid a worse-than-projected nearly 10% in the quarter ended in March, reflecting flagging sales in China despite a broader smartphone industry rebound.
The company shipped 50.1 million iPhones in the first three months of the year, according to market tracker IDC, falling shy of the 51.7 million average analyst estimate compiled by Bloomberg. The 9.6% year-on-year drop is the steepest for Apple since Covid lockdowns snarled supply chains in 2022, the researchers said.
The Cupertino, California-based iPhone maker has struggled to sustain sales in China since the debut of its latest model in September. The resurgence of rivals from Huawei Technologies Co. to Xiaomi Corp. and a Beijing-imposed ban on foreign devices in the workplace have all weighed on sales. The IDC data provides the first snapshot of the global performance of Apple’s most important product ahead of earnings on May 2.
The drop in iPhone shipments is significant given the overall mobile market registered its best growth in years. Smartphone makers shipped 289.4 million handsets in the period, marking a 7.8% rise from the trough of a year ago, when many manufacturers were grappling with a surfeit of unsold devices. Samsung Electronics Co. regained the top spot in the March quarter, while budget-focused Transsion increased shipments by 85% and Xiaomi bounced back to close the gap on second-place Apple. (…)
Average selling prices for handsets are rising, as consumers increasingly opt for premium models that they intend to hold on to for longer, IDC’s researchers found. Apple, which consistently maintains the highest ASP in the industry, has led the way in this, with consumers showing a distinct preference for its higher-tier models. Still, the company has this year resorted to unusual discounts to spur sales, with some retail partners in China taking as much as $180 off the regular price. (…)
Here’s What Higher for Longer Means for the Stock Market Stocks are still trading near record levels, but some investors say further gains may be more difficult to come by.
(…) Higher yields make stocks less attractive than holding Treasurys to maturity, and they increase borrowing costs across the economy for everything from corporate debt to mortgages to car loans.
“It changes the math,” said Quincy Krosby, chief global strategist for LPL Financial. “You have to recalibrate, you have to adjust, and the rate regime must be in concert with where the valuations are.” (…)
Small-caps, which tend to derive most of their revenue from inside the U.S., are especially sensitive to the trajectory of the economy.
One big reason: Small stocks generally devote a much larger share of operating profit to covering interest on debt than larger ones do. The ratio of operating income to interest expense within the S&P 600 was 2.3 times as of March, according to Dow Jones Market Data. That compares with 7.6 times for S&P 500 companies.
They generally issue more floating-rate debt than bigger companies, so their loan payments fluctuate with benchmark interest rates. When rates go up, that means higher interest expenses dent their bottom lines and leave them more at risk of defaults.
About 44% of debt among companies within the Russell 2000, another small-cap index, was floating-rate at the end of last year, compared with 10% for the S&P 500, according to data from Lazard Asset Management.
Adding to the crunch: About 40% of the companies in the Russell 2000 didn’t turn a profit over the past year, compared with 10% in the S&P 500, according to J.P. Morgan Asset Management. (…)
Higher interest rates propel depositors to move money to Treasurys and money-market funds for higher returns, contributing to lower deposits at banks. Meanwhile, banks have had to shell out more interest to yield-hungry depositors, particularly hurting the bottom line at small and midsize banks.
Wells Fargo said Friday it expects net interest income, or profit from lending, to decline by 7% to 9% in 2024.
Delinquency rates could also creep higher if interest rates remain high, which could increase loan losses for banks.
Higher interest rates have also pushed up mortgage rates back toward 7%, a level they haven’t seen since December. That has kept many would-be home buyers on the sidelines, leading to sharp declines in mortgage activity at the big banks, a source of revenue.
The S&P 500’s real-estate sector is down 8.8% this year, the worst performer of the 11 segments and the only group in the red.
The rate whipsaw has hit smaller banks harder than big ones. The KBW Nasdaq Bank Index, which includes heavyweights such as JPMorgan, has advanced 2.5% this year, while an index of regional banking stocks is down 14%. (…)