Bernanke in his speech on monetary policy is reiterating the recent message from himself and a majority of the Fed’s belief that another round of asset purchases will likely come on Nov 3rd as the Fed won’t wait for another downturn in economic activity and will instead respond to a lack of improvement. We saw this on Tuesday with the FOMC minutes from the Sept 21st meeting, we heard it last Monday when Bernanke spoke in Rhode Island and we heard it the Friday before from Dudley. The only question and what will be discussed on Nov 2nd and 3rd is how they will go about doing this in terms of pace and size.
Apart from double witch expiration influencing stocks and amazing Google earnings helping tech, different action is being seen in the US$, gold and other commodities and bonds in response to Bernanke’s speech. He said absolutely nothing new in terms of a deviation from market expectations of more Treasury purchases come Nov 3rd and in fact endorsed it but the reflation trade market response is clearly evidence that its been priced in for now.
In order to get to the key focus, Sept Retail Sales ex auto’s and gasoline rose .4%, above expectations of .3% and Aug was revised up sharply to a gain of .9% vs the initial report of up .5%. Both months contain the influences of Back to School buying. The core Retail Sales #, which also excludes building materials, rose .4% after a 1% rise in Aug. The only two categories that saw declines was in department stores and clothing but come after good gains in Aug. Online retailers, electronics, furniture, food/beverages and health/personal care saw good gains. Bottom line, overall sales and particularly back to school sales were pretty good but the question of at what margin sales were made due to a more discriminating customer won’t be fully known until we see earnings from those companies in the sector.
According to the Sept CPI, inflation remains benign as it rose just .1% headline m/o/m and was flat at the core, both .1% below expectations. A main factor in the low reading continues to be the rent component, specifically Owners Equivalent Rent, 25% of CPI, which was flat. It’s calculated by asking people who own homes what they think they can rent their home for. Actual rent of a primary residence rose .1%. Also keeping a lid on price gains was a .2% drop in vehicle prices, led by used cars and trucks which have seen sharp gains in the previous 6 months. Apparel prices fell .6% and were down for a 2nd month notwithstanding the sharp spikes in cotton prices. Commodity prices, 40% of CPI, rose .2% with food prices up .3% and energy up .7%. Bottom line, the inflation guessing game comes down to when, not if, the multi year highs in commodity prices begin to show up in consumer prices as measured by the CPI and PCE.