Retail sales badly undershot forecasts, including a dive in sales at nonstore retailers like Amazon. However, weekly jobless claims unexpectedly dipped, giving no indication of a softening labor market. After the data, the S&P 500 inched higher as Treasury yields continued to pull back after spiking on Tuesday's CPI data.
After a jolt from Tuesday's hot inflation report cast more doubt on near-term Fed rate cuts, incoming economic data may have an outsized influence on markets. Still, it may make sense to take the lousy retail sales data with a grain of salt.
Retail Sales
Overall retail sales fell 0.8%, including a 1.7% fall in auto-related spending. Wall Street expected overall sales to slip 0.1%, after a 0.4% rise in December that was revised down from the initial 0.6% gain.
Excluding autos, sales slid 0.6%, way below forecasts of a 0.2% gain. Sales fell 0.5% excluding both autos and gas, missing the +0.3% forecast, according to Econoday.
December retail sales excluding autos were unrevised from the initially reported 0.4% increase.
Sales at building materials and garden supplies stores tumbled 4.1%. That suggests a weather effect may have contributed to the weak data, but that's not all.
The 0.8% dive in sales at nonstore retailers such as Amazon also stands out.
That obviously wasn't weather, but seasonal adjustments may have made the data look worse than it really is. That's because sales in January of each of the past three years were boosted by fiscal policy. Stimulus checks arrived in 2021. The child tax credit expansion was still in effect in 2022, and the economy was still riding high before any Fed rate hikes. Last January saw an 8.7% cost-of-living-adjustment boost to Social Security checks.
Retail sales data is subject to large revisions. Plus, spending on goods only makes up about one-third of consumer makes up only about one-third of consumer outlays. The strongest part of the retail sales report was sales at food service and drinking places, which rose 0.7%.
We'll get a fuller picture from the personal income and outlays report on Feb. 29, which also will include the core PCE price index, the Fed's primary inflation gauge.
Jobless Claims
Initial claims for unemployment benefits slipped 8,000 to 212,000 for the week through Feb. 10 vs. expectations of 219,000.
The four-week average increased 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, wrote last week.
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More Inflation Data On Friday
Friday's release of the producer price index also could have a big influence on the near-term path of the S&P 500 and interest rates. That's because some of the key inputs into the core PCE price index come from the PPI, most notably health care, which was one of the hottest parts of the CPI.
Lately, PPI health care inflation has been much softer than CPI health care data. That partly reflects CPI data on health insurance, which is a poor real-time measure. Also, CPI data is based on out-of-pocket spending, while PPI data includes employer and government reimbursements to medical providers.
Deutsche Bank economists noted this week that a 3.4% reduction in Medicare physician reimbursements could hold down health care inflation in January.
On the other hand, there's some risk that the PPI will show a big increase in portfolio management fees, which typically rise with stock prices but haven't kept up lately.
The Fed Strikes A Balance
Even before Tuesday's consumer price index, the Fed was already reeling in rate-cut expectations following unexpectedly strong Q4 GDP and January jobs data. The strength of the economy created some risk that the Fed could "move too soon," leading inflation to settle above 2%, chair Jerome Powell explained in his Jan. 31 news conference.
January's CPI data, which showed core prices up 0.4% on the month and 12-month inflation holding at 3.9%, appeared to validate that concern.
Keep in mind, though, that the Fed is trying to strike a balancing act. While it appears that recession has been averted, chair Powell sought to provide reassurance at his Dec. 13 news conference that the Fed won't deal a blow to the economy by keeping policy too tight for too long. "We're very focused on not making that mistake."
At the moment, there's still some uncertainty about just how strong the economy really is. Layoff announcements picked up in January and the Small Business Optimism Index update from the National Federal of Independent Business this week was unexpectedly dour.
That backdrop explains why the short-term stakes are particularly high for incoming data.
Fed Rate-Cut Odds
As of Thursday morning, ahead of retail sales and jobless claims, markets were pricing in just 10.5% odds of a Fed rate cut on March 20 and 39% odds of a cut by the May 1 meeting. Odds of a rate cut by June 12 now stand at 82%, down from 92% on Monday.
For all of 2024, markets now see the Fed's key rate ending the year at 4.40%, up 15 basis points from 4.25% ahead of Tuesday's CPI data.
Current odds imply that four quarter-point rate cuts are more likely than three cuts from the current 5.25% to 5.5% range of the Fed's key rate. Still, there's been a big shift from a few weeks ago, when markets were pricing in six quarter-point cuts.
However, Fed projections released in December showed that policymakers expected three quarter-point cuts in 2024.
S&P 500 And 10-Year Treasury Yield
After the retail sales and jobless claims data, S&P 500 futures edged up 0.1% in Thursday morning stock market action. On Wednesday, the S&P 500 rebounded nearly 1%, after sliding 1.3% on the prior day's CPI inflation data. On Wednesday, the S&P 500 closed just a half-percent below its all-time closing high.
The 10-year Treasury yield, after jumping 15 basis points to a two-month high of 4.32% on Wednesday, has pulled back to 4.21%.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
