The Market Today
Tariff Delay, Shutdown Likely Averted, But Retail Sales Plunge
by Craig Dismuke, Dudley Carter
Largest Drop in Core Retail Sales in 10 Years after Volatile December: December’s delayed retail sales report was finally released by Census Bureau this morning, showing a sharp, unexpected drop in consumer purchases. Headline sales fell 1.2% MoM, at least partly affected by lower gasoline prices causing a 5.1% decline in gasoline sales. However, even excluding gasoline sales, the report was almost entirely disappointing. The only two positive sectors were building materials (+0.3% MoM) and auto sales (+1.0%). When excluding gasoline and autos, core sales fell 1.4% MoM which was the biggest monthly drop since 2009. The negative sectors included sporting goods (-4.9%), miscellaneous (-4.1%), online (-3.9%), health and personal care (-2.0%), furniture (-1.3%), general merchandise (-0.9%), clothing (-0.7%), restaurants (-0.7%), food and beverage (-0.4%), and electronics and appliances (-0.1%). The worst December performance for the S&P since December 1931, threats of a government shutdown, and uncertainty about the direction of the global economy clearly affected consumer behavior; an indication of just how sensitive real economic activity during this cycle may be to volatility in the financial markets. After good data from October and November, consumption is still projected to manage a 1.5% QoQ, SAAR gain in 4Q. However, the downturn for the previously resilient consumer signals a discouraging start to 2019.
Energy Dragged on Producer Price Inflation While Core Remained Firm: Producer prices fell 0.1% in January on a 1.7% pullback in food prices and an even steeper 3.8% decline in energy. Headline price inflation was down from 2.5% YoY to 2.0% while core inflation was down from 2.7% to 2.6%. Excluding food and energy, producer prices were up 0.3%, firmer than the 12-month average 0.2% rate. The monthly core firmness was seen across both consumer goods and capital equipment, trade services (which track prices at retailers), and transportation services (primarily consumer airline travel). Despite the weakness at the headline level, core inflation pressures from the producer pipeline were stable in January and firmer than average across several categories.
Jobless Claims Remain Elevated: Initial jobless claims for the week ending February 9 disappointingly rose from 235k to 239k. After the fallout from the government shutdown and California teachers’ strike, claims were expected to trend back toward their pre-January levels. However, they have not done so, with the current report showing an even weaker picture for newly laid off workers. While the claims data are a leading indicator for the labor market, they remain low from a historical context but surely show a slowing pace for net job growth.
Yesterday – Yields Rose as Firm Inflation, Equity Resilience Kept Weekly Upward Pressure Intact: U.S. stocks closed higher Wednesday, but it was a rocky ride to the final destination. Stocks jumped early on continued optimism about the prospects of a trade deal and government spending bill. When asked by reporters in Beijing how deputy-level trade talks are progressing, Treasury Secretary Mnuchin replied “so far, so good.” President Trump later said trade talks are “going along very well. We’ll see what happens, but I think it’s going along very well.” He also addressed the spending bill that is expected to land on his desk before the weekend. The President said his team will be searching for “land mines” in the bill, but added “I don’t want to see a shutdown. A shutdown would be a terrible thing.” The WSJ later cited sources who indicated the President would ultimately sign the deal. The major indices tumbled mid-morning, about the time Senator Rubio posted a string of tweets describing a plan for legislation intended to incentivize capital investment by making permanent immediate expensing and removing preferential treatment for Company’s stock buybacks, rectifying what he sees as shortfalls in the 2017 tax reform. A post-lunch recovery wobbled late but the S&P 500 managed to end 0.3% higher. Treasury yields rose after core inflation remained firm at 2.2% YoY, closing up for a third session in a row. After moving up and down with equities, the 2-year yield closed up 2.5 bps at 2.53% while the 10-year yield added 1.4 bps to 2.70%.
Overnight –Trade and Government Funding in Focus: In the fourth quarter, Japan’s economy grew an as-expected 1.4% (annualized), Germany’s economy avoided a recession by 0.02%, and the Eurozone economy expanded 0.2% (1.2% YoY). However, investors seem more focused Thursday on indications of if those trends could turn around in the months ahead. China’s trade data surprised to the upside in January and senior officials kicked off a two-day trading meeting in Beijing. Ending a lengthy disappointing data run, China’s exports jumped 9.1% while imports declined just 1.5%. Exports were forecasted to fall 3.3% and imports to tumble more than 10%. Some cautioned against making too much of the report, however, as exports were likely aided by front-loading of activity ahead of February’s Lunar New Year holiday. Treasury Secretary Mnuchin and USTR Lighthizer are locked in negotiations with their Chinese counterparts for the next two days, and reports indicate a meeting with President Xi could be on the agenda. After President Trump said Tuesday he could let the March 1 deadline slide depending on the progress, the White House is now reportedly considering a 60-day extension of the tariffs delay. Also in Washington, Congress is expected to vote on a spending bill that sources say the President will begrudgingly sign, despite it not fully funding a border barrier. Ahead of December’s retail sales report, U.S. equity futures had been pulled higher by European stocks while Treasury yields had tracked European yields modestly lower. Yields sank to new lows (2-year -3.9 bps, 10-year -5.2 bps) after core retail sales missed significantly.
Wednesday’s Fedspeak Signaled More Support for Wait-and-See Approach, But Indicated Rates May Still Yet Need to Be Nudged Higher: Cleveland Fed President Mester gave her second speech in as many days, and not surprisingly echoed her Tuesday remarks. In a Q&A session, she continued to indicate that interest rates may need to be nudged higher in the future if reality meets her baseline forecast. While the labor market has yet to be an inflationary pressure, she believes it’s a little past full employment evidenced by a wide-reaching scarcity of workers. Comments from Atlanta Fed President Bostic overlapped Mester’s and remained tilted to the dovish side of the policy spectrum. Bostic said he still believes the Fed should “wait and see” and, because he expects economic growth to slow in 2019, said “we can take our time” to get rates to neutral. “I have one increase for 2019, if everything performs as we expect it,” Bostic concluded. Philadelphia Fed President Harker spoke later, noting “with a temperate climate for inflation; continued strength in the labor market; very slight downside risks; solid, but moderate growth projections for the next couple of years; and, of course, a climate of uncertainty, I continue to be in wait-and-see mode.” His current outlook has one rate hike penciled in for 2019 and one additional in 2020.