Today’s retail sales report shows sales up at a 9 percent annual rate in September. By most measures, the economy continues to grow rapidly as we enter the fourth quarter.
The Week That Was
Today’s report shows September retail sales rose 0.7 percent, a 9 percent annual rate.
Nonetheless, retail sales for the third quarter were down slightly from their second quarter average.
Despite the quarterly decline, September sales data are 19 percent above their pre-Covid peak. The trend has been distorted by the explosive rise in the spring related to government payments.
The September inflation news shows consumer prices moderating.
Total consumer prices rose at a moderate 3 percent annual rate, and prices other than for food and energy rose at a 1 percent annual rate.
Despite the reported moderation, the year-over-year inflation number was 5.4 percent, the highest in thirteen years. Inflation moderated even though record price
increases were reported in business surveys.
The downward trend in weekly unemployment claims continued into the first week in October.
Initial unemployment claims fell to 293,000, down from 341,000 in September.
The latest number is the lowest since before the lockdown, when unemployment claims were 214,000.
The number of people receiving government unemployment payments also continued to trend down, to 2.6 million from 2.7 million in the
prior month.
Things to Come
Monday the Fed will report its estimate for September manufacturing output.
The Fed’s estimate has been lagging manufacturing estimates from other business surveys. One possible reason is the Fed numbers put a higher weight on auto makers, who have lagged been hampered by computer chip shortages.
Look for the Fed’s manufacturing numbers to begin to improve either this month or next, as auto production improves.
Also on Monday, the Homebuilders survey assesses the outlook for new homes in early October. Although the number last month fell from the high 80s to 76, it still reflects a strong housing market.
Market Forces
Stocks moved erratically higher this past week, with the various indexes gaining about 1 percent.
The S&P500 broke through its 10-day average and is right up against major resistance at the 50-day average.
If the S&P500 moves above the 50-day it’s a tentative sign of a change in the market’s direction. Confirmation often comes once the 10-day moves above the 50-day average.
Technical indicators attempt to measure the short-term psychology of investors. Current psychology remains negative, but not as bad as it had been.
Among the reasons for the upward move in stocks were good news on reported inflation and on longer-term interest rates.
There should also be more good news from corporate earnings. Upcoming earnings should be close to those of the second quarter and up 30 percent from the depressed third quarter of last year.
Last week I noted that when interest rates surge as they did, it is often followed by a cooling-off period. Interest rates should level off in the current vicinity before beginning their next move higher.
As for the S&P500, it is currently 26 percent above its fundamental value. Even so, stocks can still move considerably higher. The combination of easy money, low interest rates, and good earnings can keep stocks elevated for a while.
However, expect setbacks once Congress is ready to pass legislation to boost federal spending and taxes.
Outlook
Economic Fundamentals: neutral
Stock Valuation: S&P500 overvalued by 26 percent
Monetary Policy: expansive
