- U.S. retail sales declined by 1.5% M/M in September, but were better than the market expectations for a 2.1% M/M drop.

- Core retail sales, which exclude the sale of autos and gas, posted its 3rd monthly gain in 4 months. - Overall, this was a good report, and it suggests that U.S. consumer spending may be slowly clawing its way back to health.

      U.S. retail sales declined by 1.5% M/M in September, following the 2.2% M/M (downwardly revised from +2.6% M/M) gain in August. This was a slower pace of decline than the 2.1% M/M drop expected by the markets and was much better than our more pessimistic call for a 2.5% M/M drop. The key factor pushing sales lower was motor vehicles sales, which declined by a sharp 10.4% M/M as the cash for clunkers induced 7.8% M/M gain in August washed out of the data. Excluding autos, sales rose by 0.5% M/M (which was better than the market consensus for a +0.2% M/M print), while core retail sales, which exclude sales of autos and gas, rose by 0.4% M/M. On a year ago basis, total retail sales are down 5.7% M/M, while core retail sales have fallen by a more modest 1.6% M/M, suggesting that consumer spending may have stabilised. Despite the drop in the headline number, the details of the report were fairly good, as most retail spending categories posted gains. The only other major decliner, besides motor vehicle sales, was sale of building material, which declined
      by a modest 0.2% M/M. On the other hand, there were reasonable gains in the sale of furniture (up 1.4% M/M), gasoline (up 1.1% M/M), health and personal care products (up 0.8% M/M) and food (up 0.7% M/M). Sales at general merchandise stores were also up, rising by 0.9% M/M, following
      the 1.2% M/M gain the month before. Overall, this was a fairly strong report, and with the broad-based gains in spending, there are growing indications that U.S. consumer spending is beginning to stabilise. Nevertheless, with the labour market continuing to deteriorate, it will likely be some time before we can see a sustained pick-up in consumer spending, though it appears that we
      may be on the way to this outcome. As such, we continue to maintain our bias for the Fed to keep the policy rate unchanged until early 2011.