Retail sales posted their strongest monthly gain in three years and other fresh news was mostly supportive of growth in the third quarter, but market reactions have been mixed. However, in the past hour all three indexes rallied into positive territory, even as Federal Reserve chairman Ben Bernanke warned of “ongoing headwinds.”
Bernanke said the recession, from a technical standpoint, “is very likely over at this point,” but he stressed that the economy will feel weak to consumers as the labor market takes its time to re-adjust to the new reality.
"The general view of most forecasters is that that pace of growth in 2010 will be moderate, less than you might expect given the depth of the recession because of ongoing headwinds," the Fed chairman said at the Brookings Institution.
Despite that not-so-stellar forecast, stocks were edging upwards as of 12:30, with the S&P 500 trading at fresh 11-month highs. The Nasdaq is up 0.27% to 2,097, the Dow is up 0.18% to 9,644, and the S&P 500 is up 0.06% to 1,049.97
Uncertainty in equities has caused the US dollar to strengthen against an array of currencies, while the 10-year Treasury yield is essentially unchanged at 3.44%.
The fuzzy reaction earlier in the morning was a bit surprising given the broad strength of August’s retail sales numbers. The index jumped 2.7% in August, easily beating predictions for a 2.0% figure, and it wasn’t all just from the cash-for-clunkers program. Autos did soar 10.6% in the month, but expectations that the rest of the report would be soft turned out to be wrong. Sales excluding autos increased 1.1% in the month, almost tripling forecasts of a 0.4% gain.
Explaining why market reactions were mixed at best, Brian Bethune, economist at IHS Global Insight, said that while the advances were broad, most were temporary and do not point to a consumer-led recovery in the final months of 2009.
“The various fiscal stimulus measures, including the cash for clunkers program are playing a pivotal role in jump-starting the economy in the third quarter of 2009, and that should create enough initial momentum to keep the recovery in motion, but we should not be looking for consumer spending to be a major driver of the recovery beyond the current quarter,” he said.
Moreover, total retail sales remain down 5.3% compared to 12 months ago, while retail sales excluding autos are down 6.2%.
Also released an hour before the opening bell was the Producer Price Index, which was lifted well beyond forecasts with a 1.7% monthly climb. Fluctuating energy prices were responsible for the surge, as gas prices turned up 23% in August.
The Federal Reserve will need to consider raising rates if the monthly numbers continue at such a pace, but in the past 12 months the PPI headline is still down 4.3%, down from a record -6.8% in July.
Core prices, which exclude volatile energy and food prices, advanced 0.2% in the month, putting the annual change at a fairly stable 2.3%, three-tenths above the Fed’s preferred rate.
In more recent data, September’s first regional manufacturing report showed strength. New York’s Empire State survey jumped 7 points to hit +18.9, its highest level since November 2007. Forecasters, surprised by last month’s ascension, were only looking for a moderate 2-point increase this month.
Some bad news was hidden in the details though. The number of employees index worsened slightly in the month, and inventories were still being cut back.
A broader survey of inventories for July, released at 10:00, also showed contraction. The 1% cutback is a moderation from the 1.4% reduction in June, but marks the 11th straight fall. Still, declining inventories should help growth going forward, as businesses will have to restock once sales grow at a sustainable pace.
No more data is schedule for today, but at 1pm the Treasury will hold an auction for 4-Week Bills.
