In what is yet another disappointing set of US activity data, fell 1.1% month-on-month in December, worse than the -0.9% figure the market was expecting. Meanwhile, November's contraction of -0.6% was revised to an even weaker -1% MoM print.
The damage was widespread with 11 of the 14 main components posting monthly declines including motor vehicles/parts (-1.2%), furniture (-2.5%), electronics (-1.1%), gasoline stations (-4.6%), department stores (-6.6%) and non-store retailers (-1.1%). Of the three that didn’t fall we have food/beverages flat on the month, sporting goods up 0.1% and building materials up 0.3%.
Retail sales levels (February 2020 = 100)
U.S. Retail Sales Breakdown
Retail Sales Spending as a Proportion of Total Consumer Spending
Increasingly Benign Inflation Backdrop Argues Against the Need for More Major Hikes
Meanwhile the producer price inflation report showed that pipeline price pressures were also weaker than expected in December and November. fell 0.5% MoM rather than at the -0.1% rate expected while November was also revised down a tenth of a percentage point. (ex food & energy) was in line at just 0.1%, but November’s rate of price increases was revised down two-tenths of a percent.
So we have further evidence of weaker activity and an increasingly benign inflation backdrop, which clearly suggests we are in the end game for Fed rate hikes. Today’s numbers, coming after the softer CPI report, should cement expectations for a 25bp Federal Reserve interest rate hike in February and at the margin diminish the case for additional rate hikes – currently we expect a final 25bp in March. With recessionary forces intensifying and inflation looking less and less threatening, the prospects for Fed rate cuts later in the year are growing.
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