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U.S. retail sales surge
May 11, 2001: 11:57 a.m. ET

'Core' PPI, sentiment index also strong; but Fed unlikely to change course
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NEW YORK (CNNfn) - Retail sales jumped in April while wholesale prices edged higher, the government said Friday, but analysts don't expect the surprising data to stop the Federal Reserve from cutting interest rates aggressively next week.

Retail sales rose 0.8 percent in April to $275.5 billion, the Commerce Department reported, after falling a revised 0.4 percent in March. Sales were strong across a broad range of sectors from autos to clothing. Excluding the volatile auto sector, sales still rose 0.7 percent.

Wall Street economists polled by had forecast that overall sales would rise only 0.2 percent.

The surprising strength of the data -- coupled with reported strength in the closely watched University of Michigan index of consumer sentiment -- could give Fed policy makers pause when they meet Tuesday to decide whether or not to cut interest rates. Consumer spending fuels about two-thirds of the economy, and spending strength could make the central bank less urgent about cutting rates again to strengthen the economy.

"It doesn't look like from what we are seeing this morning that the economy is recessionary, and now it's probably going to cast some doubt on how aggressive the Fed is going to want to be from here," Josh Stiles, senior bond strategist with, told Reuters.

But not all analysts were convinced by the sales data.

Richard Baum, retail analyst with Credit Suisse First Boston, said mild April weather after February and March gave consumers a chance to go shopping and release some "pent-up demand." And many store cut prices to clear inventories last month, he said.

Economists expect Fed to ignore data

"Companies (retailers) are being very cautious about their guidance for the second quarter, so we're not completely taking it to heart that these (strong sales) results will carry through," Baum said.

Businesses with the strongest sales in April were gasoline service stations, whose sales rose 2.5 percent, department stores, up 1.8 percent, and apparel and accessory stores, up 1.6 percent.

As further evidence of consumer confidence, the University of Michigan said its preliminary consumer sentiment index for May rose to 92.6 from 88.4 in April, according to Reuters. Analysts polled by expected a sentiment index of only 88.5.

Still, most economists don't expect the news to sway the Fed from cutting rates by half a percentage point next week to 4 percent. The Fed already has cut rates four times this year, and another half-point cut would take the federal funds rate that banks charge one another for overnight loans to 4 percent.

"I don't think it will make any difference," said Carol Stone, chief economist with Nomura Securities International. "Regardless of what people spent in April, the fact that fewer had jobs means going forward their spending is likely to be restrained."

Stone's reference to job cuts will probably not be lost on the Fed; last week's surprisingly strong unemployment and job-cut data convinced most economists that a half-percentage-point rate cut was needed to support consumer confidence.

The implied yield on the June Fed Funds Futures contract is 4.07 percent, meaning the bond market still is betting on about an 80 percent chance the Fed will cut rates by a half percentage point. Earlier in the week, the chances were as high as 90 percent that the Fed will cut by half point.

PPI rises, stocks and bonds fall

Meanwhile, the Producer Price Index, which measures prices at the wholesale level, rose 0.3 percent last month after March's 0.1 percent drop, the Labor Department reported. Wall Street economists had forecast that the PPI would rise 0.3 percent.

The "core" PPI, excluding volatile food and energy prices, rose 0.2 percent versus forecasts for a 0.1 percent rise. Core PPI rose 0.1 percent in March.

Many analysts took the data to mean inflation is not a risk the Fed needs to worry about when deciding the future of interest rates.

"The Fed, for the time being, is likely to continue to focus on the weakness of the economy, rather than on prices," said Jade Zelnik, senior economist with Greenwich Capital Markets Inc., who expects the Fed to cut rates to 4 percent.

On Wall Street, stocks fell as investors worried the strength in sales and consumer sentiment might make the Fed less aggressive in cutting rates. Lower rates tend to spur borrowing and fuel economic growth, typically boosting corporate profits, and stock prices.

Meanwhile, U.S. Treasurys also fell, with long-term yields rising as traders began to worry about the Fed's action and inflation down the road. Inflation is the nemesis of the long-term fixed-income investor because it lowers the purchase power of future returns. Dealers discount long-dated Treasury prices, pushing yields higher, when those concerns surface.

Gemma Wright, director and market strategist for the Americas at Barclays Capital Group, said Friday's data changed the "longer-term outlook for the Fed and should keep the long bond on the soft side."  graphic

-- from staff and wire reports