1/20/23 – Sticky Prices Squeeze Consumer
Though it was a holiday shortened week in the U.S., there was plenty of action in the markets. The most significant market-moving news was the Retail Sales report for December. Recall that November retail sales were disappointing, worrying analysts that the holiday selling season was going to be a bust. That worry proved prescient! Retail sales for November were revised down from -0.6% to -1.0% from the October level. On Wednesday the government reported that December retail sales fell -1.1% from the revised November figure. Parsing through the details, the weakness was broad-based, with sales at department stores falling a shocking 6.6% from November’s level.
Released simultaneously with Retail Sales, the Producer Price index showed a welcome drop in prices, with year-over-year PPI easing to 6.2% from 7.3% recorded in November. It was the better-than-expected PPI that trumped retail in driving market direction, pushing long bond prices more than two points higher. Some analyst’s, us included, were calling the violent move “short covering,” and the price action today somewhat validates that speculation, as the long bond retraced most of the gains recorded on Wednesday.
Consensus opinion had been that the U.S. economy would slip into recession in the second quarter but the disappointing retail sales have some investors fearing that the economy may already be in recession. The first look at Q4 GDP, which really is not much more than a guess, is to be released on January 26th and the expectation is for 2.6% annualized growth. Given the consistent disappointment of economic data this month, we wouldn’t be surprised to see the release disappoint as well.
Michael Kastner was featured on the TD Ameritrade Network this week talking about the current state of the fixed income markets. To watch his appearance Click Here
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