Consumers around the world have been taking one hit after another; first came the coronavirus and the lockdowns, which gave a pretty strong blow to the global economy, then came the surge in prices, which has been hurting consumers everywhere. The US economy fell into a recession after the contraction in Q1 and Q2 GDP, while the economies of Europe are also heading there, which has been a reason for central banks to start thinking about slowing down with interest rate hikes.

But recently, we have been seeing some positive signals, as the surge in prices starts to slow while the economic data has improved. Last Friday we saw the UK and Canadian retail sales pick up again, with the US retail sales already posting an increase on Wednesday. Drilling into retail sales data shows a solid start to Q3 goods consumption

Wednesday’s retail sales data was a mixed bag with a stronger control group but weaker revisions. CIBC characterized the report as showing a drop in gasoline sales due to lower pricing and a pickup elsewhere.

The control group of sales, which excludes gasoline, autos, restaurants, and building materials, rose by 0.8%, above the consensus expectation of 0.6%, driven by a jump in online shopping. That implies moderate growth in that group in volume terms, which feeds more directly into ex. autos goods consumption in GDP.

After adjusting for prices, the control group rose 0.4%, which is a healthy (worrisome?) 8.0% above its pre-pandemic trendline, according to CIBC.

One other curiosity they highlight in the report is the contrast in vehicle sales to reported data from automakers.

“The drop in vehicle sales was in contrast to the earlier reported growth in unit sales, highlighting either a shift in
demand to lower priced cars, or the decline in used car prices that reduced nominal spending on such vehicles,” they write.

There’s pent-up demand for autos that they expect to sustain while other goods slow.

Goods consumption appears to be off to a solid start in the third quarter, but we don’t expect
the momentum to be sustained, particularly once we get past clearance sales on overstocked items. Auto sales could be
an outlier as supply chain issues abate.

TD says the Fed will welcome the slowdown in overall sales but will want to see more. They also highlighted the impact of Prime Day and how building materials are holding up, which is something Home Depot also emphasized.

Lower prices at the pump contributed to softer growth in today’s report, despite freeing up some money to be spent elsewhere. Consumers directed their attention to bargains during Amazon’s “biggest Prime Day Event ever”, which, with $3 billion in sales, contributed handsomely to headline growth this month. Despite softness in the housing market, sales at building materials and equipment stores came in at one percent in real terms suggesting that consumers continue devote a sizeable share of spending to home improvements.

In terms of implications, they fall on the dovish side of the FOMC debate, which is split nearly 50/50 in the Fed funds market.

Like July’s CPI reading, today’s release suggests things are moving in the right direction, but it’s still too early for the Fed to pivot away from the hiking cycle. We maintain the view that a 50 basis point hike will be considered enough in September but will have more clarity after the August jobs and inflation data give us a better understanding of whether the recent moderation has more legs.