Weak Retail Sales Give A Boost To Wall Street, For Now

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Includes: DIA, QQQ, SPY
by: BubbleBustInvesting

Summary

March retail sales missed market expectations, dragged down by weak car sales.

Weak retail sales are driven by "pent-down" demand.

Wall Street rallied on the weak sales numbers, as bad news is good news these days.

Things didn't look good for US retailers in March, according to a government report released this morning. Retail sales dropped by 0.3% in March, missing market expectations, dragged down by a drop in auto sales; February retail sales were unchanged.

Separately, the government reported that the March Producer Price Index dropped by 0.1%, also missing market expectations.

Indicator

Actual

Expected

Prior

Retail Sales

-0.3%

+0.1%

0.0%

Retail Sales ex auto

+0.2

+0.4

0.0

Producer Price Index (PPI)

-0.1

+0.3

-0.2

Core PPI

-0.1

+0.2

0.0

Click to enlarge

What's striking about these reports is that they come at a time the US economy and the retail sector in particular are helped by strong tailwinds - strong job and wage growth, and historically low oil prices.

What's behind the weak sales numbers?

The Federal Reserve's prolonged near zero interest rate policy, in our opinion. In the beginning, a near zero interest rate was a tailwind for the retailing sector. It encouraged consumers to move big purchases like automobiles forward. Particularly those who have access to low financing. As for the rest? The Fed's policy didn't make a difference.

But over time, the same policy turned from a tailwind to a headwind, as it fueled what we call "pent-down demand."

To understand what pent-down demand is, a good place to start is with the more familiar concept of pent-up demand. Pent-up demand, which usually arises before a period of consumer euphoria, describes a lack of demand - when consumers choose to postpone their expenditures until a future date, due to lower price expectations, depressed consumer confidence, or lack of access to credit.

In contrast, pent-down demand materializes after a period of consumer euphoria and excess borrowing, and describes the lack of current demand due to market saturation.

Simply put, consumers with access to easy money have purchased all the merchandise they wanted to buy.

As for the rest, they have stayed - and will continue to stay - on the sidelines.

That's the ugly side of Fed's easy money.

As of Wall Street, bad news is still good news, as they will give another excuse for the Federal Reserve to keep interest rates at the current, near zero level. All major equity indexes headed north, for now.

Major Equity Indexes at 11am

Index

Friday's

Performance (%)

SPDR S&P 500 Trust (NYSEARCA:SPY)

+0.42

PowerShares QQQ Trust (NASDAQ:QQQ)

+0.76

SPDR Dow Jones Industrial Average (NYSEARCA:DIA)

+0.43

Click to enlarge

Disclosure: I am/we are long QQQ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.