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December Retail Sales Decline Significantly

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Futures have swung to negative levels following three main economic metrics hitting the tape before Thursday’s opening bell. (Happy Valentine’s Day, BTW, everybody.) Perhaps early traders are still trying to digest what these figures mean — and none are cataclysmic, though all are worse than expected — so let’s take them one at a time:

Retail Sales for December took their biggest tumble in nine years, down 1.2% compared to an expected gain of 0.1%. Even worse, stripping out auto sales in the month, this figure goes to -1.8%. Ex-autos & gas, we see -1.4%, with the Control coming in at -1.7%.

Previously, we had considered Q4 strong — many analysts were expecting a third-straight GDP number at or above 3%, which would have been the first time for this since prior to the Great Recession 10 years ago. That looks to be less likely with such poor Retail numbers for 2018 holiday season.

Go back in your mind a moment to December of last year, however: markets were busy crashing on what was considered an errant interest rate raise by the Fed, and didn’t stop falling until the half-day of trading on Christmas Eve was over. Thus “wealth effect” concerns — that falling stock portfolios had a negative affect on people’s perceptions of their own wealth — may have played a part in this notably slower-than-expected Retail Sales headline. Now that we’re back from the grave, so to speak, perhaps so are people’s attitudes about what they can buy.

There is also the specter of the U.S. government shutdown to consider, though this didn’t begin until the later part of the month. That said, perhaps we can expect further weakness on Retail Sales data for January as well, when most of the shutdown took place.

From the time I began writing this article, major U.S. indexes have fallen further into the red, and these retail figures seem to have spooked traders. The other two main econ numbers don’t appear to come close to having this much of a negative impact.

The Producer Price Index (PPI) for January also went negative from a positive consensus estimate: -0.1% versus +0.1% expected. Minus volatile food & energy, this number swings back to +0.2%, which was as expected. Final Demand year over year reached +2.0%, 50 basis points lower than our last look. Control was +2.5%, shaving off three-tenths of a percentage point. That these figures are beneath expectations is not much of a problem for market participants, however, in that they will cool the Fed’s worries about inflation creep into the economy.

Initial Jobless Claims rose again, this time by 4000 claims to 239K. Strangely — especially considering the terrific monthly employment numbers the federal government puts out — we seem to have jumped out of our year-long low range of 200-225K new claims into the 225-250K territory. This is still reflective of a positive labor market, but now leaving those 50-year bests in the rearview mirror.

Again we can consider the government shutdown, which likely have had an affect on weekly jobless claims. Now that the shutdown is over — and a new shutdown looks this morning to being avoided — perhaps we’ll see these numbers head back in the other direction again.

The Federal Reserve had been concerned with waning momentum in the exuberance of the American consumer of late, and have been closely monitoring downward pressure on pricing. The lower-than-expected PPI figures seem to bear out at least some of this concern, especially in terms of global energy prices.

Much of the Fed’s about-face in ratcheting up interest rates have had to do with this softening on the consumer side, so perhaps we’re seeing a bit of this in today’s numbers. If so, this would keep at bay any inkling the Fed might be considering another rate hike at its March meeting. Currently, this looks very unlikely.

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