| USA Retail sales rose 0.6% in December, overshooting the +0.4% print expected by consensus. The prior month’s result was left unchanged at +0.3%. Sales of motor vehicles and parts contributed positively to the headline print by advancing 1.1% in the final month of Q4. Without autos, retail outlays rose a consensus-topping 0.4% as gains for non-store retailers (+1.5%), clothing (+1.5%), general merchandise (+1.3%), and miscellaneous items (+0.7%) were only partially offset by declines for health and personal care items (-1.4%), gasoline stations (-1.3%), furniture (-1.0%), and electronics (-0.3%). Outlays in restaurants and bars stayed virtually unchanged. In all, sales were up in 9 of the 13 categories surveyed. Core sales (i.e., sales excluding food services, auto dealers, building materials, and gasoline stations), which are used to calculate GDP, were up 0.8% after progressing 0.5% the month before. retail sales data came in stronger than expected. What’s more, the increase was not due to higher prices, as last week’s CPI report showed goods prices rising only 0.1% in the final month of the year. Part of the monthly gain reflected higher sales at automobile dealerships, but the strength was certainly not limited to this category alone. Outlays on clothes rose for the second month in a row, while sales at non-store retailers continued their seemingly relentless progression. Increased spending on general merchandise was another piece of good news in the report and reflected a steep gain at department stores (+3.0%). On the other hand, the furniture segment fifth decline in six months reflected a still-depressed real estate market. (Home resales remain roughly 30% below their pre-pandemic level.) Another less positive aspect of the report was stagnant sales in restaurants and bars, which suggest spending on services (which accounts for a bigger portion of GDP than spending on goods) eased during the month Existing-home sales slipped for the sixth time in seven months in December, falling 1.0% MoM to 3,780K, the lowest level of sales registered since 2010 (seasonally adjusted and annualized). As a result, sales stood 6.2% below the mark registered a year ago and 42% below the most recent peak reached in January 2021 (6,560K). Annual sales for 2023 as a whole consequently came in at 4,098K, their worst level since 1995. Despite the decline in sales in December, the inventory-to-sales by three ticks to 3.2. While this figure was roughly back where it was before the pandemic, it remained well below its historical average and at levels consistent with tight supply. (According to the National Association of Realtors, <5 indicates a tight market.) This situation was largely due to the fact that the number of homes available on the market remained at a very low level in December. In fact, despite a 4.2% annual rebound, the 1,008 K homes listed during the month represented one of the smallest inventory ever recorded for this time of year. Homeowners were understandably reluctant to put their properties up for sale at a time where moving could entail having to renegotiate one’s mortgage, which could result in a substantial increase in monthly payments The Import Price Index (IPI) remained unchanged in November instead of slipping 0.5% as forecast by economists. Import prices remained unchanged even after excluding petroleum imports, which saw prices decline 0.3% in the month. On a 12-month basis, the headline IPI weakened from -1.5% to -1.6%. The less volatile ex-petroleum gauge moved from -0.6% to -1.5% According to the latest edition of the Fed’s Beige Book, eight of the twelve Federal Districts reported little or no change in economic activity in the run-up to the January 8 survey deadline. Three others signaled modest growth and one reported a moderate decline in activity. (Six Districts had reported a decline in activity in the previous iteration of the survey.) Fed contacts signalled an improvement in consumption spending and leisure travel, but bemoaned decreases in manufacturing activity. Even though prospects of falling interest rates were fuelling optimism in the real estate sector, concerns about the office market remained. Most of the Districts reported little or no change in overall employment levels. Four signalled modest to moderate growth. There were abundant signs of a cooling labour markets, including larger applicant pools and easing wage pressures Industrial production expanded 0.1% in December instead of contracting 0.1% as expected by consensus. However, the prior month’s result was revised down from 0.2% to 0.0%. After growing 0.2% in November, manufacturing output swelled 0.1% in December, thanks in large part to a 1.6% gain in the motor vehicles and parts category, which continued to benefit from the end of the UAW strike. Excluding autos, manufacturing production actually shrank 0.1%, marking the third decline in a row for this indicator. Elsewhere, petroleum and coal products (+2.2%), furniture and related products (+1.3%), food and beverages (+0.8%), and plastics and rubber products (+0.7%) were the biggest winners, while electrical equipment (-2.4%), wood products (-1.9%), and paper (-1.3%) saw declines. Utilities output retraced 1.0% as the warm temperatures recorded in the month weighed on electricity demand. Finally, production in the mining sector rose 0.9% The Empire State Manufacturing Index of general business conditions worsened dramatically from December to January, plummeting from -14.5 to -43.7. The result surprised massively on the downside of consensus expectations (-5.0) and signalled a strong deterioration in factory activity in New York State and surrounding areas. The shipments sub-index sank further into contraction territory (from -6.4 to -31.3), while the new orders gauge dove to its lowest level since April 2020 (from -11.3 to -49.4). Work backlogs (from – 24.0 to -24.2) shrank for the 19th time in 20 months, while payrolls (from -8.4 to -6.9) decreased at a slower pace. Supply chain pressures continued to ease, as measured by the delivery times subindex, which stayed below the 0 mark (from -15.6 to -8.4) separating expansion from contraction. Input prices (from 25.0 to 40.0) and output prices (from 27.1 to 32.6) continued to advance and did so at a faster pace. Finally, business expectations for the next six months (from 12.1 to 18.8) moved further up in expansion territory but remained far below their long-term average (36.2) The Philly Fed Manufacturing Business Outlook Index continued to paint a downbeat picture of the situation prevailing in the manufacturing sector. The index improved in January (from -12.8 to -10.6) but less so than expected by consensus (-6.5) and continued to signal a deterioration of operating conditions. This was the 18th negative print in 20 months. The sub-indices tracking shipments (from -11.2 to -6.2), new orders (from -22.1 to -17.9), number of employees (from -2.5 to -1.8), and weekly hours worked (from -5.9 to -0.9) improved in the month but remained in contraction territory. As shipments and new orders remained positive, work backlogs continued to decrease at a faster pace. Supplier delivery times (from -18.1 to -27.6) continued to shorten at a faster pace as well, while input price inflation (from 24.3 to 11.3) eased somewhat. The index tracking future business activity fell back into negative territory for the first time since May 2023 (from 12.6 to -4.0), sliding further away from its long-term average (34.0) Bloomberg reported this week that under a proposed plan by US banking regulators, banks would be required to access funds from the Fed’s discount window at least once a year. Such a move would reduce the stigma of borrowing from the window and ensure that lenders are ready for any financial turbulence. The move comes in the wake of last spring’s regional banking crisis, which found some banks operationally unprepared to borrow from the discount window The slew of Fed speakers making the rounds this week were quick to reinforce that point. “With economic activity and labor markets in good shape and inflation coming down gradually” Governor Waller sees “no reason to move as quickly or cut as rapidly as in the past.” He used terms such as “carefully calibrated and not rushed” and “lowered methodically and carefully” to push back against market expectations of sizeable cuts this year. Atlanta Fed President Bostic was on a similar page. He noted that rates could be cut earlier than Q3, “but the evidence would need to be convincing.” What’s more, he urged caution given the current uncertain environment (domestic budget battles, global conflict, elections etc.), which could have unpredictable economic impacts and re-ignite inflation pressures Stocks ended mostly higher over the holiday-shortened week, although the advance was narrow—an equally weighted version of the S&P 500 Index recorded a modest loss—and heavily focused on growth stocks. Information technology stocks outperformed, helped by a rally in semiconductor shares. Artificial intelligence (AI) chip giant NVIDIA was particularly strong, as was rival Advanced Micro Devices (AMD). Markets were closed Monday in observance of the Martin Luther King, Jr., holiday. The fourth-quarter earnings reporting season remained in its early stages, with only 23 companies in the S&P 500 expected to release fourth-quarter earnings reports during the week. On Tuesday, shares of Dow Jones Industrial Average component Boeing fell sharply after the company reported earnings following an analyst downgrade warning of possible delivery delays in case regulators discover more safety issues surrounding the company’s 737 MAX airliners. The stock recovered most of its decline later in the week, however In terms of data release, the GDP print is out on Thursday. It is likely the pace of real GDP growth will moderate in the coming quarters. Year-end data support the view for decent growth to end 2023. Households continued their summer spending spree into the holidays as December retail sales report came in stronger than expected. Control group sales were revised upward for November and turned in a strong December, implying some modest upside to Q4 real personal spending. More robust government hiring and an acceleration in public investment also continue to support growth Personal Income & Spending is out on Friday. Households continued to spend in November as real personal spending rose 0.3% over the month. The boost in November spending was accompanied by a 0.4% gain in real disposable personal income, which marked the fastest gain in eight months. Although the labor market is showing signs of moderation, consumers are benefiting from real wage gains, which are in turn fueling spending. Consumer reliance on credit and buy now, pay later financing is also helping to prop up spending. However, rising delinquency rates on credit cards and auto loans cast some doubt on how long households can continue to rely on credit. Most notable was a shot higher in discretionary purchases over the month. Prior to the November report, discretionary spending had lagged non-discretionary for eight straight months, suggesting a moderation in overall spending. The last time non-discretionary spending eclipsed discretionary spending on a sustained basis, excluding the period immediately following the pandemic, was at the start of the 2008 recession. UK Retail sales for December have registered at very disappointing levels. Sales including fuel were -3.2% and down on the year by -2.4% even though markets had expected an increase YoY of 1.1%. This represents the largest monthly fall in retail sales since January 2021 when COVID-19 restrictions were affecting sales. The overall level of retail sales by volume is now at its lowest level since May 2020. The fall in retail sales was broad based: YoY sales at food stores and non-food stores were down in December by -3.1% and -2.7%, respectively. While these figures have registered at surprisingly depressed levels, it is likely to be a result, at least in part, of consumers bringing forward much of their spending to take advantage of Black Friday and other discounting in November. It is too early to say whether December’s retail sales figures are a blip or an indication of something broader. However, there is no doubt that December’s retail sales figures were far worse than expected and now raise the prospect of the UK being in a technical recession UK inflation data has registered at levels that are slightly hotter than expected. YoY headline CPI came in at 4% in December, up from 3.9% in November and 0.2pp above market expectations. YoY core CPI, which excludes the volatile energy and food components of inflation, remained flat at 5.1% in December, again 0.2pp higher than market expectations. Goods inflation saw a minor easing, down from 2% to 1.9% on a YoY basis, while services CPI edged up from 6.3% to 6.4%. While this inflation print brings some disappointment, it is notable that the UK’s inflation rate is now in line with Europe’s other major economies: France’s equivalent rate stands at 4.1% and Germany’s is currently registering at 3.8%. For much of 2023, the UK’s inflation rate had been notably higher than that of many other European counterparts. One of the factors behind this may have been that nominal pay rates in the UK were considerably higher than the Euro average ECB President Christine Lagarde signaled it was “likely” that interest rates would be cut in summer, not spring as the market had increasingly come to expect. When asked by Bloomberg at the World Economic Forum in Davos if she agreed with Governing Council members who had indicated that they expected a rate cut midyear, Lagarde replied: “I would say it is likely too, but I have to be reserved.” She said that the ECB would have crucial information on wages that would influence a policy decision by “late spring”. EU ECB President Christine Lagarde signaled it was “likely” that interest rates would be cut in summer, not spring as the market had increasingly come to expect. When asked by Bloomberg at the World Economic Forum in Davos if she agreed with Governing Council members who had indicated that they expected a rate cut midyear, Lagarde replied: “I would say it is likely too, but I have to be reserved.” She said that the ECB would have crucial information on wages that would influence a policy decision by “late spring.” The German economy shrank 0.3% in the final quarter of 2023, according to a preliminary estimate, but an upward revision to the previous quarter meant that Germany avoided a second straight quarter of contraction—the technical definition of a recession. However, gross domestic product is estimated to have shrunk by 0.3% over the whole of 2023 In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.58% lower as comments from central bank policymakers prompted financial markets to scale back bets on an early reduction in interest rates. Major stock indexes were mainly softer. France’s CAC 40 Index fell 1.25%, Germany’s DAX declined 0.89%, Italy’s FTSE MIB eased 0.61%. CHINA China’s new home prices fell 0.4% in December, down from November’s 0.3% decline, marking the sixth consecutive monthly drop and the fastest fall since February 2015, according to the statistics bureau. Following a brief recovery in early 2023, China’s yearslong real estate slump has been a major headwind to its economy despite Beijing’s efforts to prop up the sector China’s gross domestic product expanded 5.2% in the fourth quarter over a year earlier and for the full year of 2023, meeting Beijing’s official annual growth target. On a quarterly basis, the economy grew 1.0%, up from the third quarter’s 0.8% expansion. Quarterly readings provide a better reflection of China’s underlying growth than comparisons from a year ago, when major cities were still under pandemic lockdown Retail sales rose a lower-than-expected 7.4% in December from a year earlier, down from November’s 10.1% increase. Fixed-asset investment grew an above-forecast 3.0% for the full year amid higher infrastructure growth, but a decline in real estate investment deepened. December industrial production rose more than expected from a year ago, while urban unemployment edged up to 5.1% from November’s 5.0%. The youth jobless rate was 14.9% in December compared with a record high 21.3% in June, after which the government suspended the report, saying that it needed to do more research on its data collection methodology The People’s Bank of China (PBOC) injected an above-forecast RMB 995 billion into the banking system via its medium-term lending facility, but left the lending rate unchanged, disappointing traders. Nevertheless, many analysts predict that the PBOC will loosen policy this year and could cut its reserve requirement ratio to boost demand Stocks in China slumped as the latest indicators underscored the weak outlook for the economy. The Shanghai Composite Index, which is popular among domestic investors, fell 1.72%, its eighth weekly drop in the past nine, according to Bloomberg. The blue-chip CSI 300 gave up 0.44%, its ninth weekly drop in the past 10 weeks. In Hong Kong, the benchmark Hang Seng Index plunged 5.76%, according to FactSet. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, TD Economics, M. Cassar Derjavets. |
