Chief Economist's Weekly Brief 19-10-09
The Dow Jones breached the 10,000 mark for the first time since October 2008 last week, as positive Q3 company earnings announcements and better than expected retail sales data boosted investor sentiment. The stock market is now up around 50% from its March lows. Last week also saw the release of inflation data and the minutes from the last Federal Reserve rate-setting meeting which indicated that the committee still sees risks of deflation in the economy.
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US headline retail sales fell in September by 1.5% m/m (-5.7% y/y), but the fall was lower than expected, and reflected the end of the 'cash for clunkers’ program in August and high gasoline prices. Excluding autos and gasoline, sales rose a much better than expected 0.4% m/m (-1.6% y/y), on top of a 0.6% (-3.0% y/y) rise in August. This suggests overall consumer spending will have made a positive contribution to growth in Q3 and that overall US GDP will record a positive gain on a quarter-on-quarter annualised basis. This would be the first increase after four consecutive quarters of contraction in the economy.��
On the inflation front, headline inflation rose slightly to -1.3% y/y in September from -1.5% y/y in August. Core inflation (excluding energy & food) also increased slightly to 1.5% y/y from 1.4% in August, as declines in rents were offset by larger gains in several other components. The decline in rents was striking as they slipped by 0.1% m/m, the first drop since 1992 and only the second monthly fall on record.��
Indeed, the release of the minutes from the latest Federal Reserve rate-setting meeting indicates that the Fed still has concerns about deflation in the economy. The committee noted that although the recent data on consumer price inflation had been a little above expectations, "most participants anticipated that slack in both labor and production markets would be substantial over the next few years, leading to subdued and potentially declining wage and price inflation." So, despite the recent improvement in economic activity, there is no indication that the Fed will be in any rush to raise interest rates.