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Retail Sales Rise, Underlying Spending Stalls

Karl Schamotta February 14, 2020

Roses are red, violets are blue, US retail sales met expectations in January – and markets are up too. Consumer spending rose for a fourth consecutive month in January, with retail sales climbing 0.3% as Americans paid more at restaurants, home furnishing shops and building supply stores. The increase matched market forecasts and would suggest that rising incomes and a 50-year low in the jobless rate are providing ample fuel for the global economy’s “consumer of last resort”.

But, in a slightly darker turn, “control group” sales – with food services, auto dealers, building materials and gas station receipts excluded – flatlined in the month, remaining flat after a downwardly-revised 0.2% gain in December. This measure is used to strip out highly volatile categories and is considered a better gauge of fundamental spending levels – meaning that it could bolster expectations for a sharper deceleration in private consumption growth in the months ahead.

Coronavirus fears continue to weigh on broader financial markets, particularly after Wednesday’s sharp upgrade in diagnosed cases. Benefiting from safe-haven flows, the dollar looks set to end the week on a stronger note – defying almost-universal forecasts for weakness to start the year.

However, behind the scenes, the Federal Reserve’s sharper-than-expected withdrawal from short-term funding markets may be having a more significant impact on price dynamics. In an announcement made late yesterday, the central bank’s New York branch said it would reduce the amount lent into overnight repo markets by $20 billion, to a maximum $100 billion. It will also reduce its two-week term offerings by $5 billion next week, to a maximum of $25 billion, and by another $5 billion on March 3 to a maximum of $20 billion. This reduction had been telegraphed well in advance by Jerome Powell and other officials, yet is set to run on a more accelerated schedule than many market participants had expected.

This isn’t likely to trigger a Valentine’s Day massacre in markets, but could represent a headwind for asset prices (and closely-linked currencies) that have risen on hopes of further central bank stimulus. Volatility expectations may see sharp upward revisions in the weeks and months ahead.

Happy Singles Appreciation Day!

Karl Schamotta
Chief Market Strategist