The retail sales measure for September that was released on Tuesday influenced trading for the entire week. The expectation was that sales would rise 0.3% over the August tally. The actual result was a 0.7% month-over-month gain, with the August measure revised to 0.8% from 0.6%. The three-month period has been a blockbuster for retailers. The irony is that the narrative has changed since Amazon had their supersale in July. The sales event exceeded expectations, leading to forecasts that it cannibalized sales that would have occurred in August and September. That explanation has been recast that the Amazon sale actually reenergized consumers on-line shopping. Our take on it is that despite the sharp rise in interest rates over the last 18 months, the economy has yet to cool significantly.

Way back in July we wrote that the BLS non-farm payroll report told a far different story than the private ADP employment report, with the former quadrupling the latter. That situation has risen again, only in reverse. The ADP report showed tepid job growth of 89,000 in September while the BLS reported 336,000 for the period, double the number expected. Moreover, the revision of the prior two months added another 119,000 jobs to the economy. While excellent news for the economy it’s likely to put another Fed rate hike back into play at the November 1st meeting. That may not be necessary as Former Fed Governor Kevin Warsh wrote in a Wall Street Journal opinion article this week. He points out that while the Fed Funds rate is 0.5% higher since mid-May, the 10-year note yield, which is the benchmark for mortgage rates and corporate borrowing is 1.4% higher, and that is going to cause a significant bite to the economy. We whole-heartedly agree that both are going to slow the economy. Warsh correctly states that the 10-year is the benchmark for housing, but the short-term rate is the benchmark for bank debt, which typically is lower rated and carries a floating rate; to put it plainly, rising short rates are hurting lower-rated credits.

The FOMC left the Fed Funds lending rate unchanged, as was widely expected, and hinted there could be one more rate hike later this year. According to their interest rate graphic, the DOT plot, the committee anticipates another 0.25% rate hike later this year followed by a 0.50% rate cut in 2024. However next year’s expectation is the median forecast with committee members’ expectations running from 4.5% to 5.75%. The individual forecasts for 2025 are even more dispersed, ranging from 3.0% to 5.75%. In short, “higher for longer!” At the post-meeting press conference Chairman Powell was upbeat on the current state of the economy which leads us to conclude that he has become one of the more hawkish committee members.

Today we’ll look to the coming week, instead at the conclusion of the weekly wrap. The release of the consumer and producer price indices, retail sales and the Michigan surveys will be a litmus test for the Fed’s rate decision later this month. Comments from committee members seem to indicate that they will hold rates steady, but CPI and retail sales could prove problematic to that view. Recall that last month retail sales spiked, and many attributed the uptick to the Amazon prime-day sales. As such economists are looking for a month-over-month change of 0.1%. Anecdotally though, contemporaneous measures indicated that retailing continued to hum which could result in an above expectation result. More of a concern though is CPI. In June, the year-over-year measure plunged from 4.0% to 3.0%, giving the Fed some comfort that policy was moving in the right direction. Then the measure ticked up to 3.2% in July. Not a happy outcome but tolerable given that core inflation remained subdued. A similar outcome is expected next week, only economists are forecasting the YOY measure to tick up to an indefensible 3.6%. Rising energy costs will be the culprit but that’s not going to matter to consumers. The fact remains, the cost of filling the gas tank continues to hit our wallets.

Former St. Louis Bank fed president James Bullard attempted to steal the thunder from the Fed’s feel good summer meeting in Jackson Hole with his Thursday missive of accelerating growth and the need for the Fed to continue with rate increases. We asked Mr. Bullard to point to the 5 most recent economic indicators that are accelerating – He didn’t respond to Halyard’s questions.

Following last week’s retail sales beat, the only indicators to surprise to the upside were new home sales and jobless claims. Halyard would describe the economic data as “fair to middling”.

Existing home sales, which are 5x more than new home sales, fell again and are 7.2% lower year to date. Durable goods and PMI surveys both underwhelmed.