Retail Sales Disappoint

Europe remains in the headlines, with rating downgrades for two major French banks due to their Greek exposure. But the overall tone of Europe-centric headlines has improved as the Germans have started to back-peddle from some of their tougher statements.

It may be a tad calmer in Europe today, but rest assured that the issue is not going away anytime soon. But we have plenty of economic news on the domestic front this morning, with a soft Retail Sales report and a fairly benign inflation reading.

On the inflation front, we got a relatively benign wholesale inflation reading for August this morning, with the ‘headline’ flat vs. expectation of a 0.1% drop. The ‘core’ PPI number came in better than expected at 0.1% vs. an expectation of 0.2%. The more important inflation report is the CPI reading, which tracks pricing pressures at the consumer level. The August CPI report comes out tomorrow and is expected to maintain its recent ‘hot’ trend.

The bigger worry with the U.S. economy is not inflation but growth. And we got a less-than-reassuring read on the growth picture from today’s August Retail Sales report. It is at the Fed’s level that the questions of inflation and growth come together. The thinking is that hotter-than-normal inflation readings limit the Fed’s ability, due to dissentions within the FOMC, to provide further stimulus to the economy even as it sees growth faltering, as has been the case lately.

August Retail Sales came in weaker than expected, unchanged from the July level. The July growth rate was revised down to 0.3% from the originally reported 0.5% pace. ‘Core’ retail sales, which strip out the more volatile auto, gasoline, and building materials components, came inline with expectations at 0.1%. The weak reading reflects the impact of multiple unsettling developments in August, ranging from the nasty debt-ceiling debate to the rating downgrade. We should also keep in mind that Hurricane Irene most likely had a negative impact on Retail Sales along the East Coast.

The weak Retail Sales report adds to the overall mixed economic picture that is emerging from recent economic readings. While recessionary risks may be on the exaggerated side, it is undeniable that the economy’s growth pace is very low. Today’s report improves the odds that the Fed will come out with some favorable action in its upcoming meeting.

In corporate news, Dell (DELL) announced a new $5 billion share buyback program. This adds to the roughly $2 billion remaining on its existing four-year old $10 billion buyback authorization. We also have a $1.5 billion buyback announcement from Staples (SPLS), which replaces the roughly $300 million remaining on their 2007 program. General Electric (GE) is paying $3.3 billion to buy back the preferred shares held by Warren Buffet’s Berkshire Hathaway (BRK.A).

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