Tariffs Hurt Retail Sales - Redbook Sales Growth Falls

Before getting into how tariffs hurt retail sales, let's review Redbook. Every Redbook same store sales growth report is interesting for a different reason. The latest result is interesting because it includes how the consumer reacted to new tariffs being announced. 

Most consumers aren’t experts on tariffs, but the trade war likely makes them uncertain about the future. As you can see from the chart on the left, inflation in washing machines skyrocketed after tariffs were enacted in January 2018. Once the latest round of tariffs start affecting prices in June, the consumer will react relatively. 

Regardless of whether consumers know what’s causing higher prices, they will pull back on spending.

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Redbook same store sales growth in the week of May 18th was 5.2%. Which fell from 5.4% in the prior week. It was 5.9% at the start of the month. Based on the very strong May preliminary consumer confidence reading, same-store sales growth that the month started with would have continued throughout the month. That is if it wasn’t for the tariff announcement. 

Each week, investors expect same-store sales growth to get worse as the impact of tariffs grows. Even though hard data always takes precedence over this survey, the April retail sales report was tainted by its big Easter related adjustment. 

The chart on the right shows the effect of tariffs on core goods and services inflation. It would have been very interesting to see the effect of tariffs decrease later this year. 

Tariffs Hurt Retail Sales - Older tariffs are lapped 

Low inflation has been a concern of the Fed even with these tariffs. With inflation low, the Fed has come up with numerous products and services to blame. 

However, it rarely mentions how low inflation would be without tariffs. We won’t see a decline in inflation because new tariffs are about to kick in. Oxford Economics believes that because economic growth will be hurt by the tariffs, there won’t be a net effect on inflation. We will see in the coming months how accurate that thesis is.

Existing Home Sales Miss Estimates

April seasonally adjusted existing home sales were 5.19 million as you can see from the chart below. This missed the consensus for 5.35 million and the low end of the consensus range which was 5.25 million. Monthly growth improved from -4.9% to -0.4% and yearly growth improved from -5.4% to -4.4%. 

It’s very likely that we see positive yearly growth near the end of the year because of the easier comparisons. The good news in this weak report is the 3 month average of 5.293 million was the best since September. Sales of single-family homes fell 1.1% monthly to 4.62 million. The 3-month rate was 4.733 million which was the best reading since August. Condo sales were up 5.6% to 570,000.

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Supply increased markedly as it was up 9.6% to 1.83 million. That is 4.2 months relative to sales which is up from 3.8 months in March. Buyers might be putting their existing homes on the market to move into a new house. Even though sales were down monthly, prices were up 2.9% to $267,300. 

Yearly median price growth was 3.6%. In the West, existing sales were 1.11 million which was up 1.8% monthly, but down 5.9% yearly. Sales in the South were down 0.4% monthly and 1.7% yearly to 2.27 million. If the South starts to weaken, it will bring down the whole market because it is the largest region.

To be clear, existing sales don’t affect GDP, but they are important because they represent most home sales. This report gives us some reasons to not be pessimistic but doesn’t provide as many green shoots as the May homebuilder sentiment report.

Dollar About To Weigh On Corporate Earnings

A strong dollar can easily turn the expected 2nd half bump in S&P 500 EPS growth into a slump. 

As of May 16th, S&P 500 earnings growth is expected to be 2.64% in Q3 and 9.33% in Q4. Q4 has the easiest comparison, which is why growth estimates are so high. If you look at FactSet’s numbers, it could be the only quarter with positive growth in 2019. However, that positive growth can be wiped away if the trade war keeps boosting the dollar.

As you can see from the chart below, the Fed’s trade-weighted dollar index is the highest since 2002. The DXY dollar index is at $98.02 which is very close to its 52-week high of $98.33. It is up 1.92% year to date and 4.71% in the past year. 

It’s in the middle of its range since 1986 as it peaked at $122 and troughed at $72. After the 2016 election, it peaked at $102. I’m interested to see if the trade war can get this index above that long term resistance level.

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Tariffs Hurt Retail Sales - Yield Curve Not A Concern Yet

Many traders and investors have stopped following the yield curve. Part of it inverted last year and nothing has happened since then. If you expected the 5-year yield being higher than the 7-year yield to cause a recession, you were following the indicator incorrectly. You need to look at the entire curve to see if a recession is coming.

As you can see from the chart below, the linear model over a range of maturities shows the yield curve isn’t close to inverting yet. 

An inversion could occur later this year or next year, but so far there isn’t a recession warning. My prediction last year that the 2-year yield would rise above the 10-year yield by June of this year was incorrect. Yield curve could fully invert if the Fed turns hawkish. 

Since the Fed funds futures market is showing there is a 66.2% chance of at least one cut this year, if the Fed doesn’t cut rates, it would flatten the curve. Expectations for fewer rate cuts would increase the 2-year yield, possibly pushing it above the 10-year yield.

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