The weaker than expected retail sales reading provides a soft
backdrop for today's trading action, likely making it difficult for
the market to reverse the Wednesday pullback. Stocks have made
strong gains lately, with the broad indexes in record territory,
leaving them vulnerable to any negative news flow in this
seasonally weak period.
The soft Retail Sales read this morning follows the weak report
last month as well. This runs counter to the broadly improving
trend in economic data that has been pointing towards the U.S.
economy shaking off the forces that held it down in the first
quarter of the year. Retail Sales are important as they serve as a
proxy for the all-important consumer spending component of the
economy, even though it isn't a perfect proxy as the report tracks
nominal (or non inflation adjusted) sale of merchandise at the
retail and food service establishments. In other words, this report
measures the durables and non-durables components of consumer
Today's report was expected to clarify the picture and assure us of
a May rebound on the merchandize and durables side, but we didn't
see that. The saving grace of today's report is that the April
numbers were modestly revised higher. That said, this report will
have some dampening effect on GDP growth estimates for the current
period. Stepping back from this and other recent data releases, it
is obvious that the U.S. economy has bounced back in Q2, but the
magnitude of the rebound may not be as strong as many had expected.
As we saw in today's report, weather may not have been the only
restraint in Q1. We are seeing this in housing, business capital
spending and other economic data. This means that we should be
skeptical of hopes of above-trend growth going forward.
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