In yet another round of disappointing US activity data, shares fell 1.1% m/m in December, worse than the -0.9% market expectation. Meanwhile, November’s -0.6% contraction was revised to -1% mom, an even weaker reading.
Damage was widespread, with 11 of the top 14 components reporting monthly declines, including automotive/parts (-1.2%), furniture (-2.5%), electronics (-1.1%), distributors petrol (-4.6%), department stores (-6.6%) and non-stores (-1.1%). Among the three sectors that did not decline were Food & Beverage which were flat for the month, Sporting Goods which rose 0.1% and Building Materials which rose 0.3%.
Retail Levels (Feb 2020 = 100)
An increasingly favorable inflationary context argues against the need for further significant increases
Meanwhile, the producer price inflation report showed that pipeline price pressures were also weaker than expected in December and November. it was down 0.5% year-over-year instead of the expected -0.1%, while November was also revised downwards by a tenth of a percentage point. The consumer price index excluding food and energy remained in line at just 0.1%, but the rate of increase in prices in November was revised downwards by two tenths of a percentage point.
So we have more evidence of weakening activity and an increasingly supportive inflation environment, clearly suggesting that we are in the late stages of the Fed hiking rates. Wednesday’s data, which comes after the weaker report on the CPI, should bolster expectations for a 25 percentage point interest rate hike by the Federal Reserve in February and, on the sidelines, reduce the argument for further rate hikes – we currently expect a final 25 percentage point hike percentage points in March. As the forces of the recession intensify and inflation looks less threatening, the prospects for a Fed rate cut later in the year are growing.