US: Week guided by politics and retail sales - Westpac

Elliot Clarke, Research Analyst at Westpac, notes that in the US, another disappointing retail sales print was received this week, February seeing a third consecutive decline in sales.

Key Quotes

“The January outcome was revised up, but only to –0.1%. Weather was certainly a factor in February in two ways: auto sales continue to come back to a more normal level after their hurricane-induced spike in late 2017; also abnormally cold weather in February weighed on gasoline and store sales as consumers stayed home. While we expect consumer spending to strengthen in coming months as weather effects abate, our core expectations remains that consumption growth will be weaker in 2018 than 2016 and 2017. Despite the benefit of tax cuts, real income growth remains weak and the savings rate is low; further, wealth is highly skewed towards the top of the income distribution. Hence, support for additional discretionary spending is limited. Going forward, higher interest rates are also likely to weigh on durables spending, particularly autos. This result has put a dent in expectations for Q1 GDP, but for now markets remain positive on the 2018 view, principally because of the scale of support offered by legislated government spending and belief in stronger business investment.”

“The key source of uncertainty for the US remains the administration of President Trump. Following Gary Cohn’s resignation as Chief Economic Advisor, Secretary of State Tillerson has since been fired. And, as we noted last week, murmurs of trade actions against China are surfacing. Equities have been little affected given the market’s optimism over growth. But the US dollar is under pressure. A material interest rate differential has opened up between the US and the rest of the developed world, and the FOMC has made clear they will continue to raise rates through 2018 and 2019. Yet the US dollar index (DXY) is almost 13% below its December 2016 peak. The impact of fiscal uncertainty and rising deficits is clear for all to see. It is not surprising then that the first point of business for President Trump’s new Chief Economic Advisor Larry Kudlow has been to stand in support of the currency and the outlook for the US economy.”