Despite the mixed economic data, traders on Wall Street remained optimistic, driving both stocks and bonds higher as they anticipated the upcoming inflation reading (PPI) that is expected to provide clarity on the Federal Reserve’s future actions.
Even in the absence of support from the Mag 7, the S&P 500 neared a potential new record high. Concerns among investors regarding an overheated consumer market were somewhat alleviated by the decline in retail sales, following initial fears triggered by a higher-than-expected inflation report earlier in the week. Additionally, the decrease in bond yields suggests market expectations of further easing measures by the Federal Reserve in 2024, with June already pricing in a potential rate cut according to Fed swaps.
The recent slowdown in U.S. retail sales can be interpreted in two ways, depending on one’s perspective. On one hand, it indicates a significant deceleration in nominal spending, marking the weakest retail sales reading in 10 months. This slowdown raises concerns about the resilience of the U.S. economy, especially considering recent data indicating sustained strength despite the Federal Reserve’s efforts to moderate economic activity.
Viewed through the lens of Fed policy, the weaker-than-expected retail sales figures may help ease worries about the Fed’s prolonged “higher for longer” stance. However, Thursday’s data also included revisions to previous months’ retail sales figures, revealing a less robust spending impulse in December than initially reported, with November’s gain being entirely revised away. With three out of the last four months showing a decline, the overall trend in retail sales appears less positive than previously believed.
While “severe weather” may be cited as a factor contributing to the decline, it is noteworthy that this explanation does not fully align with the positive performance of restaurant sales during the same period. The sluggish retail figures could be attributed to a “holiday hangover” or a ‘payback effect” as consumer spending patterns adjust post the festive season. Regardless of the interpretation, it serves as a relief valve following the warmer inflation reading earlier in the week, prompting traders to reduce the likelihood of an immediate rate cut by the Fed.
In a recurring pattern, jobless claims undershot expectations, with initial claims dropping to 212,000 in the week of February 10, compared to the consensus of 220,000. However, continuing claims for the prior week increased to 1.895 million, surpassing estimates by 30,000. While ongoing claims may hint at a possible recession landscape, the series of initial filers suggests a robust labor market, a narrative that is likely to persist until the NFP headline indicates otherwise.
Thursday’s data painted a nuanced picture of the American consumer landscape, with January data hinting at potential consumer retrenchment despite facing significant credit card debt and rising delinquency rates. The mixed performance of retail sales, with only a few categories showing gains, underscores ongoing concerns about consumer spending patterns.
Despite these challenges, there is limited evidence of a substantial deterioration in the U.S. labor market. Initial jobless claims continue to demonstrate resilience and stability, indicating that significant disruptions have not yet affected the labor market.
The intricate interplay of these factors highlights the complex and constantly evolving dynamics within the U.S. economy, complicating the task of forecasting the timing and pace of anticipated Fed cuts in 2024.
With investors preparing for another round of inflationary scrutiny following a recent warmer CPI report, the focus remains on inflation metrics despite the subdued start to the year in U.S. retail and manufacturing. The upcoming PPI report is eagerly anticipated by market participants for its insights into inflationary pressures at the producer level, serving as a key indicator of consumer inflation trends.
Market participants are particularly attentive to the upcoming PPI report, which is expected to provide valuable insights into inflationary pressures at the producer level. The PPI tracks the average change in selling prices received by domestic producers for their output and is widely considered a leading indicator of consumer inflation trends.
In a recent statement, Lael Brainard attributed lingering inflation partly to corporate greed, highlighting how consumer brands, instead of reducing prices, have opted to shrink packaging—a phenomenon she referred to as “Shrinkflation,” a term gaining traction in discussions about macroeconomic trends.