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SOLID RETAIL SALES IS THE MAIN COURSE IN TUESDAY'S DATA BUFFET

A swath of mixed economic data, dominated by an upbeat retail sales report, continued to prime the pump regarding expectations for a Fed rate cut slowdown in 2025.

Receipts at U.S. retailers USRSL=ECI increased by 0.7% in November, stronger than the 0.5% analysts expected and standing on the shoulders of an upwardly revised October figure.

Delving deeper into the Commerce Department's report, a 2.6% surge in motor vehicle purchases and a 1.8% jump in non-store retail (which includes online/e-commerce) provided much of the upside muscle.

Excluding autos, retail sales rose by a much more languid 0.2%.

Core retail sales, which excludes autos, gasoline, building supplies and food services - a metric which corresponds closely with the personal expenditures element of GDP - increased by a robust 0.4% after dipping 0.1% in October. "For all the economists who are too afraid to say that the economy does not need a rate cut right now ... this report is an uncomfortable fact," says Carl Weinberg, chief economist at High Frequency Economics. "This report on retail sales clouds the view (that a rate cut) is needed."

On a less festive note, industrial output USIP=ECI surprised economist by decreasing 0.1% last month, defying the consensus call for a 0.3% increase.

Rubbing salt in the wound, this follows a downwardly revised October, which decreased by a steeper-than-previously-stated 0.4%.

Capacity utilization USCAPU=ECI, a measure of economic slack, was also surprisingly downbeat, easing 20 basis points to 76.8% instead of rising to 77.3% as economists projected.

"The manufacturing sector is limping into the home straight of 2024," writes Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. "Meanwhile, we think that heightened uncertainty over tariff and immigration policy will dissuade manufacturers from investing in additional capacity until the policy picture is clearer."

Next, the homebuilders as remained pessimistic this month.

The National Association of Home Builders' (NAHB) Housing Market index USNAHB=ECI held firm at 46 instead of inching higher a still-gloomy 47 as analysts predicted.

Despite the gloom, future sales expectations brightened.

"While builders are expressing concerns that high interest rates, elevated construction costs and a lack of buildable lots continue to act as headwinds, they are also anticipating future regulatory relief in the aftermath of the election," writes Carl Harris, chairman of NAHB.

But Nancy Vanden Houten, lead U.S. economist at Oxford Economics, isn't quite as upbeat.

"We are less upbeat about housing than builders for 2025," Houten writes. "Given our outlook for only slightly lower mortgage rates next year, we expect just a modest improve in new home sales and housing starts."

"Also, the risk is that tariffs and deportations boost construction costs, adding to new home prices and exacerbating existing affordability challenges."

And finally, the value of goods stacked in the store rooms of U.S. businesses USBINV=ECI increased in October by 0.1% as expected.

As a reminder, private inventories have been a net drag on GDP in three of the last four quarters.

(Stephen Culp)

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