Last week, our retail therapy was a raging success, with both the retail sales report and earnings from most retailers putting a smile on economists’ and investors’ faces. The October retail sales report was robust, with headline sales growing by 1.7% for the month versus expectations of 1.4%. Retail sales grew at 16.3% year-over-year. The details of the release were also encouraging since retail sales, excluding the volatile auto and gasoline components, rose 1.4% against estimates of 0.7%.
Retail sales reached a new all-time high without much help from auto-related sales due to supply chain disruptions. Nonstore retail, which includes online sales, grew at a 6.1% rate, likely boosted by holiday sales. The robust consumer demand is excellent news for the economy and markets. Since as noted last week, the combination of good economic growth and higher inflation is palatable to markets, but a sniff of stagflation would not be received well. After slower third-quarter GDP growth of around 2%, the Federal Reserve Bank of Atlanta estimates over 8% growth for fourth-quarter growth. While the expected GDP growth rate will likely moderate in the coming weeks, it should remain around 5%.
As noted last week, many retailers reported earnings, including Walmart (WMT), Target (TGT), Home Depot (HD), Lowe’s (LOW), Kohl’s (KSS), TJX Companies (TJX), Macy’s (M), and Ross Stores (ROST). All the retailers noted beat earnings estimates and some beat expectations by eye-popping levels like Macy’s (+291% above estimates) and Kohl’s (138% above estimates). The S&P 500 retailing industry group was over 4% higher for the week.
The week was going swimmingly until Austria announced that it would again enter a nationwide lockdown due to increased coronavirus infections. Austria is the first western European country to revisit lockdowns and mandate Covid-19 vaccines. Germany is considering similar moves as it struggles with a surge in infections. The trend of higher infections in Europe was first flagged as a risk back at the end of October.
While the U.S. has seen a significant decrease in the pace of Covid infections since the September peak, the rate of change moved higher last week. The spike in infections in Europe and the start of lockdowns has undoubtedly raised the specter of a Winter surge in U.S. infections and the headwind to the economy for possible restrictions.
Markets reacted quickly to the rising risk of a global economic slowdown from the possibility of the significant restrictions in Austria spreading elsewhere. The yield curve flattened in the U.S., indicating an increased risk of future recession despite the robust economic data last week. To be clear, the yield curve remains far from predicting an actual recession, but it moved in the wrong direction. Growth stocks, including the technology sector, dominated for the week, particularly on Friday when the news of the Austrian lockdown was released.
While this new wave of Covid infections is a headwind to global economic growth, it does not yet seem likely to have a significant U.S. impact. The U.S. vaccination rate, along with the existing and soon-to-be-released therapeutics, has likely broken the extreme link between infections and hospitalizations. So far, the high frequency and non-traditional economic data are not reflecting a change in behavior in the U.S. that would significantly change the economic outlook. For example, there were four days last week with more than 2 million people passing through TSA checkpoints. One would expect air travel to be an early indicator if people were becoming uncomfortable again.
Congress priorities are on negotiating the hefty tax and spending bills along with another looming debt ceiling, but the House and Senate are on recess next week. President Biden is expected to announce his Fed Chair selection before the Thanksgiving holiday. Jerome Powell remains the favorite to retain the position, but Lael Brainard could be a surprise pick. Global PMI data for November is likely to reflect the headwinds from the increased infections in Europe. The holiday-shortened trading week should be focused on continuing to digest the inflationary environment and the Fed chair announcement while keeping a wary eye on the Covid situation.