Strong US retail sales reinforce chance of Fed hike in December

US retail sales rose more than expected in October as households bought motor vehicles and a range of other goods, pointing to sustained economic strength that could allow the Federal Reserve to raise interest rates next month.

The US commerce department said on Tuesday retail sales increased 0.8 per cent last month, also boosted by demand for building materials likely as households cleaned up and made repairs in the wake of Hurricane Matthew.

“This is just the kind of data the Fed doves need to see to convince them to hike rates in December. The economy is doing pretty well, this data is bullish for the economic outlook in the months ahead,” said Chris Rupkey, chief economist at MUFG Union Bank in New York.

Core

Adding to the report’s strong tone, September retail sales were revised up to show a 1.0 per cent increase instead of the previously reported 0.6 per cent rise. The combined September and October sales gain was the largest two-month rise since early 2014. Sales were up 4.3 per cent from a year ago.

Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.8 per cent last month after an upwardly revised 0.3 per cent gain in September.

These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have risen 0.1 per cent in September.

Economists had forecast overall retail sales increasing 0.6 per cent and core sales advancing 0.3 per cent last month.

The strong sales report is a good omen heading into the holiday shopping season. Last week, Macy’s and Kohl’s Corp expressed optimism about the holiday shopping season, despite reporting a decline in sales in the third quarter.

US Treasuries were trading higher, while stocks rose. The dollar was little changed versus a basket of currencies.

Labour

September’s upward revision to core retail sales suggests that the economy’s 2.9 per cent annualised growth rate in the third quarter could be raised when the government publishes its second estimate later this month.

Coming on the heels of data this month showing a rapidly tightening labour market and signs of a turnaround in the manufacturing sector, the upbeat retail sales report implied a pickup in economic activity early in the fourth quarter.

The Atlanta Fed is currently forecasting the economy growing at a 3.1 per cent annualised rate in the fourth quarter.

The retail sales report also reinforced views that the Federal Reserve will raise interest rates at its December 13th-14th policy meeting. Rate hike prospects have also been boosted by a rally in US stocks in the wake of the last week's election of Republican candidate Donald Trump as the next president.

The Fed this month left interest rates unchanged but said its monetary policy-setting committee “judges that the case for an increase in the federal funds rate has continued to strengthen.” The US central bank raised its benchmark overnight interest rate last December and has held it steady since, largely because of concerns over low inflation.

But inflation is creeping higher. A separate report on Tuesday from the labour department showed import prices increased 0.5 per cent in October after gaining 0.2 per cent in September.

Boost

In the 12 months through October, import prices fell 0.2 per cent, the smallest decrease since July 2014, after declining 1.0 per cent in September.

Retail sales last month were driven by a 1.1 per cent increase in auto sales, which followed a 1.9 per cent jump in September. Retail sales also received a boost from receipts at service stations, which advanced 2.2 per cent on rising gasoline prices.

Sales at building material stores increased 1.1 per cent following a 1.8 per cent surge in September. The strength in building material sales was reflected in Home Depot’s robust third-quarter profit and sales reported on Tuesday.

Last month, receipts at online retailers surged 1.5 per cent. Online retailers like Amazon have been grabbing market share from traditional department chains like Macy's and Kohl's.

Receipts at sporting goods and hobby stores rose 1.3 per cent. Sales at restaurants and bars, however, fell 0.7 per cent, likely as the stormy weather kept people at home.

Households also spent more on clothing, groceries and grooming last month, but cut back on furniture.

"As uncertainty over the election outcome remains elevated, October's retail sales performance provides some comfort that the primary driver of US GDP growth remains on solid footing," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

– (Reuters)