Two Data items today.
#1: We really need to talk about the 10-year US Treasury. Despite a strong Retail Sales report (more on that in a minute) and other positive economic reports, yields here dropped to 1.54 pct, the lowest levels in a month. We’ve been outlining several themes in recent weeks about what’s push-pulling Treasury yields. The argument for higher yields comes down to US inflationary pressures. The argument for static/lower yields center on the still-slack pace of global inflation, as evidenced by oil prices. These peaked for the year back in early March, right alongside the highs for Treasury yields.
We’re still in the camp that 10-year Treasury yields will rise as the European economy recovers and the global reflation trade kicks in. In our view what’s happening in the Treasury market is exactly the same as what we’ve seen numerous times throughout the last 13 months in other asset classes. Markets especially exposed to the “reopening trade” have their fits and starts, get overextended, pull back, and then head higher. Some, like US small caps, can get extremely overbought and need time to consolidate (we’re in such a phase right now). Treasuries are seeing the same sorts of pendulum swings.
Now, if we’re wrong it’s because of this chart: a 40-year lookback at 10-year Treasury yields. As we often tell you, if this were a stock price chart you’d probably say this company’s equity is going to zero. Bond investors have been rewarded for buying every dip in Treasury prices for 4 decades. Yesterday we highlighted that fixed income fund money flows were picking up. The search for safe-ish yield, even at rates below expected future inflation, is clearly not over.
Final thought: while we’re not in this camp, one could reasonably say the drop in Treasury yields today challenges the central bullish argument for US stocks – faster economic growth in the second half of 2020 and thereafter. Stocks rose on lower discount rates, yes, but cyclical groups underperformed and so did US small caps. We don’t see this bear case holding water but in the interest of completeness we did want to mention it.
#2: Three thoughts on the US Advanced Retail Sales data out today:
First, the 9.8 percent increase versus February 2021 is the second-best comp of the entire Pandemic Recession period. Only May 2020’s 18.3 pct comp was better, and that was mostly just a snapback from April 2020’s 14.8 pct decline. March 2021 retail sales clearly benefited from both US economic reopening and stimulus checks but remember that February 2021 was an easy comp (-2.7 pct).
Takeaway: this data is going to be lumpy for a while, so while the trend is our friend for now we won’t be surprised if April’s Retail Sales number comes in below expectations.
Second, here’s a breakdown of the one-month, seasonally adjusted changes in the report’s major classifications, ordered by best to worst comps:
- Sporting goods, hobby, etc.: +23.5 pct
- Clothing and accessories: +18.3 pct
- Motor vehicles and parts dealers: +15.1 pct
- Food service and drinking places: +13.4 pct
- Building materials, supplies, garden: +12.1 pct
- Gas stations: +10.9 pct
- Electronics and appliances: +10.5 pct
- Total Retail Sales: 9.8 pct
- General merchandise: +9.0 pct
- Furniture and home furnishings stores: +5.9 pct
- Health and personal care stores: +5.7 pct
- Food and beverage stores: +0.7 pct
Takeaway: the general trends here certainly fit the narrative of economic reopening. New clothes and restaurant meals trump home furniture and supermarkets.
Lastly, one point we’ve not seen mentioned elsewhere: US ecommerce retail sales lagged overall sales last month (+6.0 pct vs. 9.8 pct), and recent data shows the structural pickup for online retail from the pandemic may only be about 2 points of overall share gain.
Here is a chart that shows ecommerce (what the Census report calls “nonstore retailers”) revenues divided by Retail Sales excluding Food Service since January 2019. The highlight box shows January 2020’s level of 14.7 percent. March 2021’s reading was 16.7 percent, just 2.0 points higher. April 2020’s all-time high was 20.7 pct.
Takeaway: in-person shopping is part of the US reopening consumer experience, and the trend we see in the chart above is for a further shift away from online shopping in the months ahead. You can bet Amazon is watching this data carefully, as is every VC who’s funded a shopping app recently. We’ll keep an eye on it in the months ahead as well.