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Instant View: March retail sales down 0.4 percent

NEW YORK (Reuters) - Retail sales contracted in March for the second time in three months, a sign the American economy may have stumbled at the end of the first quarter.

Retail sales fell 0.4 percent during the month, the Commerce Department said on Friday. That was below analysts' expectations that sales would be flat.

Readings for retail sales have been volatile so far this year, making it difficult to know whether the weakness in March was due to a tax hike that went into effect at the start of the year or to temporary factors related to the weather.

U.S. producer prices recorded their biggest drop in 10 months in March as the cost of gasoline tumbled, according to a government report on Friday that supported the case for the Federal Reserve to maintain its very accommodative monetary policy.

The Labor Department said its seasonally adjusted producer price index fell 0.6 percent last month, the largest drop since May, after increasing 0.7 percent in February.

Economists polled by Reuters had expected prices received by the nation's farms, factories and refineries to fall only 0.2 percent.

COMMENTS:

ROB CARNELL. CHIEF INTERNATIONAL ECONOMIST AT ING COMMERCIAL BANKING:

"Whether the US March weakness is just a weather-related effect, or has a deeper connection with earlier tax increases and the sequestration process, will only be evident with a bit more data. But the latest offerings confirm the picture painted by recent payrolls and business surveys.

"A combination of soft activity and extremely benign inflation data is a good signal for US Treasuries, which are poised to rally on these and similar data over the coming months. A return to talk about downscaling of Fed QE does not look imminent until this soft patch is past - which we think will be by mid-year. Then bond yields may stage a reversal. Until then, the domestic and international environment is very bond supportive."

YELENA SHULYATYEVA, U.S. ECONOMIST, BNP PARIBAS, NEW YORK:

RETAIL SALES: "This (drop) is from the effect of the payroll tax increase. The revised data is clearly showing us that. Consumer spending is looking a lot weaker for Q1 and going into Q2. Part of the problem might be the weather because people didn't go out to shop as much as usual.

"We still think Q1 GDP will be stronger than Q4. Now we are seeing a lot of fading from the front-loaded spending due to storm-related spending. We are at 3 percent GDP for Q1 and 1 percent for Q2."

ELLEN ZENTNER, SENIOR U.S. ECONOMIST, NOMURA SECURITIES, NEW YORK:

"We expected it to decline across the board and that's what we got.

"It's not just an energy story, although that is a big part of it. After an earlier run-up in gasoline prices they reversed course in March. So there's some price-related weakness in this report.

"Weather also was a big factor in March, it basically threw a bucket of water on Easter sales.

"So there are some one-off factors in this report. I would point to bad weather and the reversal of gasoline prices. But other than that, if you take into account that January and February retail sales were revised downwards and March showed a pretty broad decline in retail sales, that tells us that we weren't capturing properly earlier weakness in consumer spending due to the higher tax burden.

"It takes households time to adjust spending to changes in disposable income. We thought it would begin markedly in February, but instead it's begun markedly in March.

"This retail sales report extends the string of reports we've been getting on March that indicates activity slowed late in the first quarter and sets the stage for slower growth going into the spring and summer."

ROB CARNELL. CHIEF INTERNATIONAL ECONOMIST AT ING COMMERCIAL BANKING:

"Whether the US March weakness is just a weather-related effect, or has a deeper connection with earlier tax increases and the sequestration process, will only be evident with a bit more data. But the latest offerings confirm the picture painted by recent payrolls and business surveys.

"A combination of soft activity and extremely benign inflation data is a good signal for US Treasuries, which are poised to rally on these and similar data over the coming months. A return to talk about downscaling of Fed QE does not look imminent until this soft patch is past - which we think will be by mid-year. Then bond yields may stage a reversal. Until then, the domestic and international environment is very bond supportive.

TERRY SHEEHAN, ECONOMIC ANALYST, STONE & MCCARTHY RESEARCH ASSOCIATES, PRINCETON, NEW JERSEY:

"Retail sales were below expectations, largely due to a steeper than expected decline in the gasoline component. Gasoline prices came down more than we anticipated. Some of the other declines appear to be associated with cold weather in March that discouraged some sales of spring merchandise. It looks as if this will put March PCE (personal consumption expenditures) at about flat. But for the quarter overall we're looking for PCE to be up about 3.2 percent. That translates to first-quarter GDP of about 3.0 percent."

PETER CARDILLO, CHIEF MARKET ECONOMIST, ROCKWELL GLOBAL CAPITAL:

"The retail sales numbers were disappointing. It shows that the economy continues to weaken and consumers are cautious. This also confirms the sequester's impact on the economy."

CARY LEAHEY, SENIOR ADVISOR, DECISION ECONOMICS, NEW YORK:

"Retail sales were weaker than forecast, with mild downward revisions in January and February. That takes some gas out of the first quarter so people might knock down their first-quarter GDP forecasts by about a quarter percentage point with most people around 3 percent to begin with.

"To some extent, this drop in March sales is payback for a great February. The trend is more subdued than one might have thought two or three weeks ago. The worry is the full reaction to the expiration of the payroll tax cut and to the sequester budget cuts won't be evident until sometime this quarter.

"The period of maximum vulnerability of the economy to the big drag in fiscal policy this year is between March and July. That will throw cold water on anyone thinking the Fed was going to be winding down quantitative easing this summer."

AVERY SHENFELD, CHIEF ECONOMIST, CIBC WORLD MARKETS ECONOMICS, TORONTO:

"March looks increasingly like a month of deceleration for the U.S. economy, as retailing joined a host of other indicators pointing that way. U.S. retail sales were disappointing across the board, as results trailed even our below consensus forecast.

"Separately, PPI was also softer than expected with a -0.6 percent reading for March, but was in line with expectations for the core measure with a 0.2 percent rise. Overall, today's data reinforces dovish expectations for a longer run of Fed QE action, and is bullish for fixed income, while a negative for consumer and retail equities (although the latter tend to move on the individual chain store reports)."

OMER ESINER, CHIEF MARKET ANALYST, COMMONWEALTH FOREIGN EXCHANGE, WASHINGTON:

"The miss in retail sales sends concerns about the impact of higher payroll taxes and uncertainty stemming from the government's sequester spending cuts.

"It dents the optimism about the pace of recovery in the U.S. It is the latest in a growing list of economic numbers that will likely keep the dollar pressured and the Fed in no hurry to normalize policy."

MARKET REACTION: STOCKS: U.S. stock index futures extended losses BONDS: Prices for U.S. Treasuries added to gains FOREX: The dollar extended its declines against the yen on Friday after data showed U.S. retail sales unexpectedly fell in March.

GRAPHIC:

U.S. retail sales: Retail sales unexpectedly fell by 0.4 percent in March - the second contraction in three months. http://link.reuters.com/fak93t

(Americas Economics and Markets Desk; +1-646 223-6300)

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