Wall Street rallied on Tuesday, following the release of mixed news on the state of the U.S. economy by federal agencies.
At 8.30 am, the U.S. Census Bureau released the October advance sales estimate report and import prices, confirming that the U.S. economy continues to grow as inflation picks up. (See Insiders’ Hot Stocks on TipRanks)
Retail Sales
U.S. retail sales jumped 1.7% mom October of 2021, up from a 0.8% rise in September, beating market expectations of a 1.4% rise. That’s the most substantial gain since March, as consumers spent more on gas and holiday season items. Nonstore sales registered the most significant gains, followed by gas sales, electronics, and appliances.
October retail sales remained solid, even after excluding the volatile components of autos and gas. That’s good news for the growth of the U.S. economy, as retail sales make up a big chunk of consumer spending and the nation’s Gross Domestic Product. It’s also good news for the shares of listed retailers selling products to consumers. Thus, a tailwind for Wall Street, which staged a strong rally on Tuesday.
Apparently, American consumers are in a spending mode, which is further evidenced by strong sales from Walmart (WMT) and Home Depot (HD), adding to the positive investor sentiment. Walmart’s sales increased 9.2% in Q3, while Home Depot sales increased 9.8%. Both companies see strong sales continuing in the near future.
Still, the strong October retail sales numbers should be interpreted with caution for several reasons. First, they have been skewed to the upside by rising inflation numbers.
Second, they come a few days after the University of Michigan reported that consumer sentiment plunged to 66.8 in November of 2021 from 71.7 in October, below market forecasts of 72.4. That was the lowest figure since November 2011, thanks to rising inflation, meaning that inflation is beginning to take its toll on the American consumer. Things could turn worse on the inflation front, based on the import prices report.
Import Prices
Import prices rose 1.2% in October, up from a 0.4% rise in September, ahead of market forecasts of a 1% rise. That’s the largest monthly jump since a 1.3% jump in May.
As expected, price hikes for imported fuel top the list of price hikes, rising 8.6%, up from a 3.9% rise in September, reflecting higher petroleum and natural gas prices.
Then there’s a 0.4% rise in the price of normal imports, up from a 0.1% rise in the previous month, reflecting higher nonfuel industrial supplies and materials prices.
Looking at import prices on an annual basis, they rose 10.7% in October, the highest annual rise since June.
Rising import prices are bad news for the economy. They feed into the cost-demand pull inflation spiral, as some imported commodities are inputs to the production process of several sectors of the economy.
Fuel, for instance, is an input to the transportation industry, which has to raise prices to its customers to make up for the higher prices it has to pay to buy. Higher transportation costs, in turn, send a shock wave of price increases to the industries that need to move their resources and products to the end-users.
That’s the last thing the U.S. economy needs at this point, as inflation is already elevated. Both the Consumer Price Index and Producer Price Indexe are rising at a pace not seen since the 1990s, as discussed in previous pieces here.
The Bottom Line
Wall Street is caught on the cross-trend of a stronger economy and rising inflation, which helps companies raise sales, but sets up the stage for higher interest rates, as the Fed would have to raise interest rates sooner rather than later.
Disclosure: At the time of publication, Panos Mourdoukoutas owned shares of Walmart and Home Depot.
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