Higher rates and rising inflation haven’t seemed to put a dent in shopping habits. Retail sales rose 0.7% in March after an upwardly revised 0.9% rise in February. Ex-auto and gasoline sales, a less volatile look at sales, rose 1.1%, the strongest pace in over a year. Internet sales were the primary driver of the index, rising 2.7%, regaining the strength lost earlier in the year. While this is welcome news, it is difficult to know how much internet shopping was for necessities, or discretionary spending. Sales of clothing, sporting goods and electronics were negative in March. The stronger-than-expected consumption should feed generously into first quarter GDP and possibly provide a boost to second quarter as well. The first look at 1Q2024 GDP will be reported next week and is expected to be up a healthy 2%.

Beige Book – Feet on the ground tend to tell a more accurate story than electronic data, as evident from the latest Federal Reserve Beige Book. Recent economic reports have portrayed a picture of strong consumer spending, rising inflation, a booming labor market and an overall healthy economy. However, according to actual business leaders, overall economic activity expanded only slightly since late February. Consumer spending barely increased, with several business contacts mentioning weakness in discretionary spending. Price increases were modest on average, but many businesses found it more difficult to pass cost increases on to consumers, resulting in smaller profit margins. Employment was only slightly improved, with nine Federal Reserve districts reporting very slow to modest increases, and the remaining three districts reporting no changes in employment. The disconnect between reality and data is only making it more difficult for anyone, much less the Fed, to gain an accurate understanding of post-COVID economics.

Higher for Longer – Stock prices and bond yields continued to move wildly this week. Aside from strong consumer spending and geopolitical events adding volatility, the financial markets grasped on to an old mantra – higher for longer. Federal Reserve Chair Jerome Powell sounded more hawkish this week in a conversation with the Bank of Canada’s Governor. Powell said the recent data has not given the Fed the confidence it needs to cut interest rates, adding the committee can keep rates at the current level “as long as needed.” A nod was given to the “considerable decline in inflation” in the last two years but progress deteriorated this year. On top of Powell’s renewal of higher-for-longer, a couple of UBS Group AG analysts went as far as to suggest rate hikes could resume in 2025, potentially bringing the funds rate to 6.50%. While this is likely not the most probable outcome, yields soared and stock prices fell on the realization that there may not be a rate cut this year.