US retail sales show strong momentum - Nomura

Analysts at Nomura explained that retail sales in October through December suggest strong momentum in Q4 PCE. 

Key Quotes:

"Core (“control”) retail sales rose at a healthy pace of 0.3% m-o-m in December. The increase was below expectations (Nomura: 0.6%, Consensus: 0.5%), but November was revised up strongly to a 1.4% increase (previously reported as 0.8%) and October was raised to a 0.5% increase (previously reported as 0.4%). 

Solid core retail sales appear consistent with elevated consumer sentiment and a strong labor market with low unemployment. However, strong revisions suggest consumer spending in Q4 was shifted backward to front months, partly due to issues with seasonal adjustment. Many retailers have started holiday discount campaigns earlier than usual amid fierce competition. Yet, seasonal factors are slow to adjust as they are revised only once a year. Thus, it is possible that an earlier start to the holiday shopping season may have confounded seasonal adjustment processes, amplifying the increases in October and November. 

Looking at the details, sales at nonstore retailers rose a solid 1.2% in December after a sharp 4.2% gain in November, likely reflecting an increasing share of holiday sales captured by online platforms. By contrast, sales at many brick-and-mortar retail stores, vulnerable to increasing online shopping, declined. Department store sales fell 1.1% in the month after a modest 0.3% increase in November. Sales at electronics stores declined 0.2% after strong consecutive increases in prior months. Additionally, sales at goods, hobby, book and music stores fell 1.6%.

Among the noncore components, sales at autos and auto parts dealers rose only modestly by 0.2%, pointing to a modest pace of auto sales as replacement demand after major hurricanes has mostly waned. Excluding autos and auto parts, retail sales were up 0.4% (Nomura: 0.4%, Consensus: 0.3%). Elsewhere, sales at gasoline stations remained flat, reflecting retail gasoline prices that trended marginally lower in December. Altogether, retail sales rose 0.4% m-o-m, slightly below consensus (Nomura and Consensus: 0.5%).

Q4 GDP tracking update: Although December core retail sales were slightly weaker than expected, backward revisions to November and October sales were positive. Further, incoming inflation data that we use to deflate nominal PCE were in line with our expectations. Altogether, retail sales in October through December suggest slightly stronger real PCE in Q4 than we expected. After rounding, we raised our Q4 real GDP tracking by 0.1pp to 2.4% q-o-q saar."