Today's Soft Data Argue Against a Fed Rate Hike

Today's data on August Retail Sales and Industrial Production were weaker than consensus -- in line with the risks I highlighted in a prior blog -- and argue against a Fed rate hike next week.  The Atltanta Fed's model will likely lower its nowcast of Q316 Real GDP Growth from the latest 3.3% forecast.  While the worst of the soft patch may be over, it does not look like there will be a strong bounce, if any.

1.  August Retail Sales fell both in Total (-0.3% m/m) and Ex Auto (-0.1% m/m) and followed downward revisions to both June and July.

        a.  Consensus for August Retail Sales was -0.1% and +0.2%, respectively.

2.  August Industrial Production fell 0.4% m/m, weaker than the -0.3% consensus.

        a.  Importantly, Manufacturing Output also fell 0.4% m/m -- despite a rebound in motor vehicle assemblies -- and followed downward revised gains in June and July.   Fed hawks had cited the June-July gains when they upped their rhetoric a few weeks ago.

3.  While the Phil Fed Mfg Index jumped to +12.8 in September from +2 in August, the bulk of the details weakened.

        a.  An average of the components that map into the Mfg ISM fell in September.

        b.  Note that the overall Phil Fed Index reflects answers to a question about overall business conditions.  The details are more company specific, as they regard orders, production, inventories, employment, etc.  Companies should be more knowledgeable about the latter than the former.

4.  The Claims data suggest the worst of the soft patch may be over.  Both Initial and Continuing barely moved up in the latest week, suggesting that the hurricane-related bad weather in parts of the country did not significantly depress them in the prior week.  Both are slightly below their respective August average.

5.  The August PPI showed no inflation in the headline prints -- 0.0% m/m Total and +0.1% m/m Core.  Consensus was 0.1% m/m for both.

       a.  Excluding the dubious Trade Services Component, as well as excluding food and energy, the PPI rose 0.3% m/m.   But this high print followed a 0.0% m/m print in July and has been volatile in recent months.

       b.  The components that feed into the PCE Deflator look soft to benign.  

       c.   Tomorrow's August CPI report is more important to the Fed and the markets.