Retail sales significantly fell short of expectations, notably with a decline in nonstore retailers (e-commerce) sales. Surprisingly, weekly jobless claims decreased, suggesting no signs of a weakening labor market. Following the data release, the S&P 500 edged higher, and Treasury yields continued to retreat after the spike seen in Tuesday's CPI data.
With Tuesday's inflation report raising uncertainty about potential Fed rate cuts in the near term, upcoming economic data could have a pronounced impact on the markets. However, viewing the disappointing retail sales data with caution might be prudent.
Unexpected Declines in Auto and Exclusionary Sales
Total retail sales experienced a 0.8% decline, including a notable 1.7% drop in spending related to autos. Contrary to Wall Street's expectation of a 0.1% slip, December's 0.4% rise was revised down from the initial 0.6% gain.
Excluding auto-related sales, there was a more significant decline of 0.6%, well below the anticipated 0.2% increase. Sales, excluding both autos and gas, decreased by 0.5%, falling short of the forecasted +0.3%, as reported by Econoday. The December retail sales data, excluding autos, remained unchanged from the initially reported 0.4% increase.
The unusual conditions weren't just about the weather; adjustments for the season might have made the data seem worse. In the past three years, January sales got a boost from fiscal policies like stimulus checks in 2021, continued child tax credit expansion in 2022, and a strong economy before any Fed rate hikes. Last January, we had an 8.7% increase in Social Security checks due to a cost-of-living adjustment.
Retail sales data can change a lot; spending on goods is only a third of what consumers spend. The bright side of the retail sales report was a 0.7% increase in sales at food service and drinking places. For a clearer picture, one has to wait for the personal income and outlays report on Feb. 29, which will also include the core PCE price index, the key inflation measure for the Federal Reserve.
New jobless claims dropped by 8,000 to 212,000 for the week ending Feb. 10, beating the expected 219,000. However, the four-week average rose by 5,750 to 218,500.
The upturn in both the Challenger survey's measure of layoff announcements and the official state WARN notices of mass layoff and plant closures point to rising claims over the next few months
Ian Shepherdson, chief economist at Pantheon Macroeconomics
PPI's Impact on S&P 500 and Interest Rates
Friday's producer price index release may significantly impact the short-term trajectory of the S&P 500 and interest rates. This is particularly true for the core PCE price index, where crucial inputs, especially in health care, are derived from the PPI. Health care, a vital element of the CPI, has been notably active.
Notably, PPI healthcare inflation has been milder compared to CPI healthcare data. This is partly due to the lagging real-time nature of CPI data on health insurance. Additionally, CPI data is based on out-of-pocket spending, while PPI data incorporates employer and government reimbursements to medical providers.
Deutsche Bank economists have highlighted a potential 3.4% decrease in Medicare physician reimbursements, which could temper healthcare inflation in January. Conversely, there is a possible risk of a significant increase in portfolio management fees in the PPI, traditionally tied to stock prices but not keeping pace recently.
S&P 500 Rebounds, Futures Edge Up Post-Data
Following the release of retail sales and jobless claims data, S&P 500 futures in Thursday morning's stock market trading showed a slight 0.1% increase. The S&P 500 recovered nearly 1% the previous day after a 1.3% decline attributed to the prior day's CPI inflation data. The S&P 500 was just 0.5% below its all-time closing high as of Wednesday's close.