The Market Today

Retail Sales Disappoint; Fed Continues Turning More Hawkish


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Retail Sales Stink in December: Retail sales fell 1.9% MoM in December, disappointing expectations for a 0.1% decline.  Gasoline sales dropped 0.7% and auto sales fell another 0.4%.  When excluding autos and gas, core sales fell 2.5% MoM versus expectations for a 0.2% decline.  In addition to the December weakness, November’s tallies were revised lower.  One of the few positive results, building material sales rose 0.9%. Leading the declines, non-store retailer sales plunged 8.7%, furniture and home furnishings declined 5.5%, sporting goods/hobbies/books dropped 4.3%, and clothing and accessories fell 3.1%.  Consumption was expected to slow in December because of the Omicron wave, but this report showed a larger decline and broader impact than was expected.

Business Schedule for Economic News: The January Bloomberg Survey of Economists is likely to show much more hawkish rate projections (8:00 a.m. CT).  December’s Industrial Production report is expected to improve at a minimal rate, including a small gain in manufacturing output (8:15 a.m.).  Business inventories are expected to continue climbing in the November report (9:00 a.m.).  And the first look at consumer confidence in January from U.M. is expected to show a slight pull back (9:00 a.m.).


OTHER ECONOMIC NEWS

Fed’s Brainard Signals March Hike Is a Possibility: Fed Governor Brainard ensured members of a Senate committee during her confirmation hearing for Vice Chair that she is “very focused” on the recent surge that led to the fastest inflation rates in decades. Brainard acknowledged that inflation is “too high,” but said, “We do have a powerful tool and we are going to use it to bring inflation down over time.” “The committee has projected several hikes over the course of the year,” Brainard said, referencing December’s dot plot, adding, “We will be in a position to do that, I think, as soon as asset purchases are terminated. And we will simply have to see what the data requires over the course of the year.”

Fed’s Barkin Supports March Hike, Inflation to Decide How Fast and Far Rates Go: Richmond Fed President Barkin said if inflation were “to remain elevated and broad-based, we would need to take on normalization more aggressively, as we have successfully done in the past.” Barkin has previously signaled support for raising rates as early as March. Beyond that, “the timing and pace of any rate moves” would be determined by inflation’s trajectory, Barkin said, noting “The closer that inflation comes back to target levels, the easier it will be to normalize rates at a measured pace.”

Fed’s Evans Sees Rate Hike Discussions in March, Not Ready to Commit to a Move: Chicago Fed President Evans, historically a dove, said that monetary policy was “wrongfooted” and “not well positioned” to deal with the recent inflation surge. “I expect that March will be a real meeting where we think seriously” about raising rates, he said, while stopping short of supporting the move. Reflecting on the median dot in December’s dot plot, which called for three rate hikes this year, Evans noted, “I was aligned with that.” However, “It could be four if the data don’t improve quickly enough on inflation,” he added, acknowledging that “inflation has longer legs and is more persistent than I expected.”

President Biden Reportedly Makes Picks to Fill Final Three Fed Vacancies: Reports Thursday evening said President Biden would nominate Sarah Bloom Raskin to be the Fed’s next Vice Chair of Supervision. Raskin currently teaches law at Duke and previously served as both a Fed Governor and deputy secretary of the Treasury. The same reports said the President would nominate Lisa Cook, a professor at Michigan State, and Phillip Jefferson, a professor at Davidson College, to fill the final two vacancies on the Fed’s Board of Governors.


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TRADING ACTVITY

Treasury Yields Slipped as Stocks Ended Their Recovery: Stocks stumbled after a couple of a solid daily gains and a positive open Thursday, gradually selling off to close near session lows. The S&P 500 fell 1.4% as tech shares reversed recent positive momentum to lead losses across most sectors. The softer tone for tech companies dragged the Nasdaq down 2.5% while the Dow slipped 0.5%. Treasury yields were little changed overnight but began a gradual and steady decline following another inflation update for December. Producer price inflation showed strong price gains but avoided a surprise acceleration that could have dashed expectations that pressures will moderate as 2022 unfolds. Treasury yields’ morning descent continued after an uneventful auction of 30-year Treasury bonds posted a small tail but stronger indirect interest and a relatively consistent bid-to-cover ratio. For the day, the 2-year yield slipped 2.6 bps to 0.89%, the 5-year yield fell 4.6 bps to 1.47%, and the 10-year yield dropped 3.9 bps to 1.70%.

Stocks Remain Weak As Bank Earnings Begin; Treasury Yields Higher Despite Retail Sales Miss: U.S. equity futures erased overnight gains around 6 a.m. CT, tracking a sharp decline in shares of JPMorgan Chase and joining most global indices in negative territory. The major U.S. bank beat revenue and earnings estimates, the latter metric benefitting from a release of loan losses previously set aside early in the pandemic. The company, however, saw a larger-than-expected increase in non-interest expense that included higher compensation costs and said expenses are likely to rise further this year. JPMorgan’s stock was down 3.4% around 7 a.m. CT. Shares of Wells Fargo rose after its positive earnings release while Citi’s stock price declined on mixed revenue results. Following the early-morning reversal, U.S. index futures were down between 0.5% (Dow) and 0.9% (Nasdaq). Despite the losses tallied by global equity indices, sovereign yields were higher. Treasury yields rose by between 1 and 2 bps across the curve but were in a clear downtrend from session peaks heading into December’s retail sales report. Despite the brutally disappointing retail sales report, stocks and yields held their ground.


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