US Data Analysis: Strong demand, weaker inflation, Goldilocks state for markets set to return

Stagflation? Not so fast. The state in which price rises cause demand to disappear and the economy to sink seems the opposite description of what US data is showing. Buy the stocks dip?

US Retail Sales jumped by 0.8% in August, contrary to a drop of 0.7% projected. A decline in car sales dragged expenditure lower – core sales soared by 1.8% while a drop was projected. The Retail Control Group – which excludes additional items and it considered "the core of the core" – jumped by 2.5%. Downside revisions to July's data do little to diminish the impact of the outstanding report. 

The US consumer was out and about in August, contrary to the depressing University of Michigan's ten-year trough in its Consumer Sentiment Index. Will these figures push the Federal Reserve to taper its bond-buying scheme? An early withdrawal of stimulus would hurt stocks.

Fed Chair Jerome Powell already signaled that a September taper – aka "Septaper" – is not on the cards. However, another factor could push such a reduction further into the future. After the Core Consumer Price Index (Core CPI) cooled to 4% YoY in August, other inflation figures also pointed to that direction. 

The latest data point is the Priced Paid component of the Philly Fed Manufacturing Index, which eased from 71.2 to 67.3 points in September. A similar drop was recorded in the New York Fed Manufacturing Index, and Import Prices also surprisingly fell in August. Those claiming inflation is transitory have scored win after win this week.

A strong economy and easing inflation means more Fed support – supporting stocks – and higher corporate profits. Share prices are doing what they often do in September – fall. However, the accumulation figures could turn the ship around. Buying the dip has been the market mantra for years, and there seems to be no reason to dismiss it now. 

For the dollar, it means that current gains may be unjustified. The safe-haven greenback has been benefiting from worries about growth, Fed tapering, and covid. If stocks turn back up, the dollar would soften.