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The Call @ Hedgeye | March 28, 2024

Takeaway: Retail Sales close 4Q at 6 year highs. Reflation's Rollover finds some early confirmation. 4Q17 (still) = #Quad 2, 1Q18 (still) = #Quad 1.

Having to rescale your positive y-axis higher when incorporating new growth data is always great ….  when you're bullish.

A couple quick highlights to close the week in domestic macro:

This morning’s Retail Sales figures for December provided a fitting capstone to the domestic consumption data to close 2017.

  • Headline Retail Sales chased strong sequential gains in October and November with a +0.4% M/M increase in December, taking year-over-year growth up to +5.5% Y/Y in 4Q, marking the fastest pace of growth in 6 years.
  • Control Group:  Same acceleration story for the GDP input series as Control Group Sales rose +0.3% M/M on the back of last months outsized 1.4% sequential gain.  On a Q/Q annualized basis, Control Group Sales finished 4Q at a remarkable +8.6%.  On a year-over-year basis, growth closed 4Q at +5.1% Y/Y, marking the fastest rate of increase since 3Q11.
  • Industry Level:  Strength remained fairly broad despite the e-commerce led consumption bonanza comp in November. Half of industries registered accelerating Y/Y growth with e-commerce and housing related (building materials & furniture) leading gains. 
  • Inventory-to-Sales Ratio’s across both the wholesale and retail channels remain in retreat.  The ISM inventory readings are telling a similarly lean(er) story, suggesting nearer-term production activity should remain solid.

In short, what we’ve been seeing in recent quarters is what late cycle expansions are supposed to look like.  The shallow, low amplitude trajectory of the post-crisis recovery and the associated hysteresis have cloaked that reality but what’s seemingly anomalous in the context of the present expansion is prototypical of every expansion.  

Consumption's 2017 Capstone | You Know It's Good When ....  - RS Headline

Consumption's 2017 Capstone | You Know It's Good When ....  - Retail Sales Control Group

Consumption's 2017 Capstone | You Know It's Good When ....  - Retail Sales e commerce

Consumption's 2017 Capstone | You Know It's Good When ....  - RS Table

CPI | Reflation’s Rollover = 3 for 3:   While the reflationary ramp since September has been notable, our baseline expectation has been for inflation to crest and roll into 1H18 as steepening base effects and soft core pricing growth conspired to drive to another round of modest-to-moderate disinflation. We detailed that expectation last week on our 1Q18 Macro Themes call.  

On the back a deceleration in Import Price growth on Wednesday and a -50bps deceleration in Headline PPI yesterday, this morning’s CPI print for December completed the deceleration trifecta as Headline CPI slowed -10bps to +2.1% YoY and Core Price growth (+1.8% Y/Y) held below target for a 9th consecutive month.   

Oil’s latest reflationary thrust is supportive of headline price growth in January but, remember, energy has to comp a +10.8% Y/Y print in January and a +15.2% Y/Y comp in February.  Reflation’s Rollover pt. 2 won’t be as conspicuous as the 1Q17 original and we’ll stay dynamic and data dependent on that view, but the December price data is providing some early, positive confirmation. 

Consumption's 2017 Capstone | You Know It's Good When ....  - CPI Headline   Energy

Consumption's 2017 Capstone | You Know It's Good When ....  - CPI Breadth

Consumption's 2017 Capstone | You Know It's Good When ....  - CPI Key Cost Basket

Consumption's 2017 Capstone | You Know It's Good When ....  - CPI Core Goods   Services

Consumption's 2017 Capstone | You Know It's Good When ....  - CORE PCE

GIP Forecast Update | With the advent of his morning’s DEC retail sales data – which confirmed the trend higher in domestic consumer spending – and this morning’s CPI data and yesterday morning’s PPI data – which confirmed our forecasted #Quad2 setup domestically (2.12% in Q4 vs. 1.97% in Q3) – our GIP Model is now tracking at 2.69% YoY/3.28% QoQ SAAR for 4Q18E. Our headline forecast compares to 2.67% for Bloomberg Consensus and 2.78% for the Atlanta Fed. Both headline GDP growth and headline inflation are likely to cool off considerably here in Q1, although the underlying YoY trend in the former remains supportive of our #Quad1 forecast for 1Q18E. Refer to following the charts for context surrounding our updated forecasts.

Consumption's 2017 Capstone | You Know It's Good When ....  - U.S. GIP Model 1

Consumption's 2017 Capstone | You Know It's Good When ....  - U.S. Real GDP Estimates YoY 2

Consumption's 2017 Capstone | You Know It's Good When ....  - U.S. Real GDP Estimates QoQ SAAR 3

Consumption's 2017 Capstone | You Know It's Good When ....  - U.S. Headline CPI Estimates YoY 4

Consumption's 2017 Capstone | You Know It's Good When ....  - U.S. Predictive Tracking Algorithm Summary Table 5

Christian B. Drake

Darius Dale