The Market Today
January Blowout for Nominal Retail Sales
by Craig Dismuke, Dudley Carter
Mortgage Applications Hit by Higher and Higher Rates: Mortgage applications for the week ending February 11 dropped another 5.4%. The average 30-year mortgage rate rose another 22 bps to 4.05%, matching the highest level since mid-2019. It is now up 78 bps in the last 8 weeks. Purchase apps fell 1.2% for the week and refi aps dropped 8.9%.
Retail Sales Rebound Strongly in January: Retail sales blew out expectations in January, rebounding 3.8% after disappointing expectations in November and December. That weakness appears to have been completely reversed in the January report. Categorically the results were split. Motor vehicles and parts rose 5.7%, building materials gained 4.1%, and gasoline sales fell 1.3%. Core sales rose 4.8% versus expectations for a 1.3% gain. This marked the strongest non-stimulus-payment-associated monthly result of the pandemic cycle. Furniture and home furnishings sales jumped 7.2% and general merchandise store sales gained 3.6%. Leading the way, likely related to quarantines in January from Omicron, online sales bounced 14.5%. Even controlling for the noise from the seasonal adjustments, the January data look strong. Although, it must be remembered that the figures are nominal, not adjusted for inflation.
Manufacturing Activity, Inventories, Homebuilder Confidence: January’s Industrial Production report (8:15 a.m. CT) is expected to show activity climbed 0.5% on a larger gain on utilities output and a 0.2% increase in manufacturing. December’s Business Inventories data and NAHB homebuilder confidence will be released at 9:00 a.m.
FOMC Minutes Now Dated: The Fed’s January Meeting Minutes (1:00 p.m. CT) will provide insight into rate-hike and balance sheet roll-off discussions but will be dated. The meeting took place before January’s CPI inflation data which cemented the paradigm shift in expectations for monetary policy.
OTHER ECONOMIC NEWS
Senate’s Confirmation of Fed Appointees Stalls: The Senate was expected to vote Tuesday on the five Fed nominees recently appointed by President Biden, including the reappointment of Powell as Fed Chair and promotion of Governor Brainard to Vice Chair. Republicans on the Senate Banking Committee didn’t show up to the vote Tuesday as an objection to the appointment of Sarah Bloom Raskin to fill the vacancy of Vice Chair of Supervision. Republicans’ absence prevented the quorum necessary to hold the vote. While there remains uncertainty around Raskin’s future as a nominee, the remaining four individuals are expected to receive adequate support once a vote is held.
Stocks Rallied and Yields Rose as Geopolitics Leaned in Right Direction: Stocks rallied and the Treasury curve steepened Tuesday in response to signs that tensions on the border between Russia and Ukraine may be easing. Following mixed trading across Asia, market sentiment brightened as the European session opened on reports that Russia was pulling back some troops it had sent to the border. Treasury yields rose as equities jumped and oil prices slid from their highest levels since 2014. After a meeting with German Chancellor Scholz, Russian President Putin said, “We want to resolve this issue now, right now or in the near future, through negotiations, peaceful means.” Despite western countries and NATO cautioning that the détente was preliminary, stocks held their gains, closing near the highs of the day in their best sessions of the month. The Nasdaq rallied 2.5% and tech strength led the broad 1.6% and 1.2% gains for the S&P 500 and Dow. Energy was one of just two sectors that declined Tuesday as oil prices fell nearly 4% in response to easing geopolitical tensions, the biggest decline of the year. Treasury yields were relatively steady during U.S. trading despite another hotter-than-expected inflation report, finishing near the levels reached immediately after the Russia headlines hit overnight. The 2-year yield edged 0.3 bps higher to 1.58% as the 5-year yield rose 2.9 bps to 1.94%. The 10-year yield closed up 5.6 bps at 2.04%, its loftiest finish since July 2019.
Stocks in Asia staged a catch-up rally Wednesday while indices in Europe and the U.S. checked up and Treasury yields edged lower ahead of the January retail sales report. Russia’s claim that it was recalling more troops from its border with Ukraine continued to be challenged by officials from NATO, who cautioned again that there was yet any evidence of a drawdown of Russia’s military presence. While Asian equities rose more than 1% overnight, Europe’s Stoxx 600 was hovering below the flatline before 7 a.m. CT and U.S. index futures were lower by roughly 0.3%. Global inflationary pressures also remain a focus for investors as decades-fast price increases have elicited a hawkish pivot from central banks around the world this year. Both producer (+9.1% YoY) and consumer (+0.9% YoY) price increases in China slowed in January by more than expected. In the U.K., however, headline and core CPI picked up unexpectedly from 5.4% to 5.5% and from 4.2% to 4.4%. The Bank of England has raised rates twice in recent months and surprised markets a couple of weeks ago by beginning to allow bonds purchased during the pandemic to roll-off the balance sheet. Just before the retail sales release, Treasury yields were lower by roughly 1 bp across the curve. Yields initially rose after the stronger-than-expected spending report but settled back lower minutes later.