• U.S. retail sales were softer than expected, falling by 0.3% M/M, following the upwardly revised 1.8% M/M gain in November.

• Excluding autos, sales were down by 0.2% M/M, while core retail sales dropped 0.3% M/M.

• This was a disappointing report, as it suggests that holiday spending may be off the pace expected, though spending in the quarter as a whole was quite robust.

U.S. retail sales declined for the first time in 3 months, with a 0.3% M/M drop in December. This comes on the heels of the upwardly revised 1.8% M/M (previously reported as +1.3% M/M) gain in November. The drop in sales in December was in stark contrast to the 0.5% M/M advance expected by the markets. Excluding autos, sales were down 0.2% M/M, while core retail sales, which excludes spending on autos and gas, declined by 0.3% M/M. Despite the drop in December, sales are up 5.4% Y/Y, while the 3-month an­nualised moving average of sales rose to 11.3% from 3.6%, suggesting significant positive momentum in consumer spending in the last quarter of the year, though the level of sales across all of 2009 was slightly weaker than it was in 2008.

The details of the report were weak, with spending on electronics (down 2.6% M/M), miscellaneous items (down 1.0% M/M), food and beverage (down 0.8% M/M), motor vehicles (down 0.8% M/M) and on general merchandise (down 0.8% M/M) quite weak. On the other hand, consumer expenditures on sporting goods (up 1.6% M/M), at gasoline stations (up 1.0% M/M) and on health and personal care products (up 0.8% M/M), were reasonably strong.

Overall, despite the surprisingly weak headline print in December, the performance of retail sales in the last quarter of 2009 suggests some significant positive momentum on consumer spending and may augur well for Q4 GDP. Not­withstanding this, with the U.S. labour market remaining quite weak and consumer credit continuing to decline, we expected consumer spending growth in the coming months to be relatively soft.