It’s Friday the 13th which carries some superstitious baggage in this country but it’s not a universal sentiment. In Greece and some Spanish-speaking countries, Tuesday the 13th is more feared. For Italy it’s Friday the 17th that keeps people on edge. In parts of Asia the number four is considered unlucky as the pronunciation in many languages is close to the word death. That means April 4th (4/4) is a day to be cautious. We could go on but you get the point. Superstitions are very much cultural in nature and what that means for investments we’re not quite sure other than perhaps one investor’s perception of risk may be entirely different than another’s.
Treasury prices have been trending higher in reaction to the Trump press conference on Wednesday where he spent more time berating the media than he did talking about infrastructure spending, tax cuts or other fiscal policy measures and that put a dent in risk-on assets with Treasuries the beneficiary. This morning, the Treasury curve is down a bit in price as it digests the just released December Retail Sales and PPI reports.
We have been of the opinion that the run in equities from the election through year-end priced in much of the wishful thinking over changing fiscal policies and while sentiment and optimism measures continue to climb there is some consolidation occurring in the markets as tax cuts, de-regulation, and fiscal stimulus may not be as fast developing as initially thought. And there is some rethinking as to how much those changes can realistically boost growth when demographic and productivity headwinds continue to work against higher growth rates. Thus, Treasuries continue to move lower in yield from the 2.60% highs of mid-December with the current yield at 2.39%.
December retail sales rose 0.6% missing the 0.7% forecast but well clear of November’s revised 0.2% gain (up from 0.1%). Despite the miss 8 of 13 sectors showed gains with auto sales driving the headline gain by rebounding 2.4% after a –0.2% dip in November. Sales ex-autos increased just 0.2% versus 0.5% expected and 0.3% in November illustrating the extent to which autos drove the monthly gain. Sales ex-autos and gas were unchanged missing the 0.4% estimate and the 0.3% gain in November. That miss reflects higher gas prices for the month along with the aforementioned auto sales strength. The figures used in GDP calculations, which exclude categories such as food services, auto dealers, home-improvement stores and service stations, rose 0.2%, missing the 0.4% forecast while the November print was revised lower from 0.1% to unchanged. The miss in the Control Group print may force down some 4th quarter consumer consumption estimates and that could drop some GDP estimates as well. Bloomberg currently pegs 4th quarter GDP at 2.2% and the Atlanta Fed’s GDPNow estimate is sitting at a rather lofty 2.9%.
December PPI was also released this morning and was pretty much on the screws as to expectations. Overall PPI rose 0.3% matching the 0.3% estimate and just below the 0.4% November reading. PPI ex-food & energy was up 0.2% just above the 0.1% forecast but well below the 0.4% gain in November. On a year-over-year basis PPI was up 1.6% matching the 1.6% forecast and above the 1.3% November print. Core PPI year-over-year was up 1.6% beating the 1.5% forecast but matching the 1.6% print in November.
While PPI was mostly as expected, December CPI next Wednesday will be more closely watched by the market and while not the Fed’s preferred inflation measure it is the broadest. And with the labor market essentially at full employment inflation will move front and center in the Fed’s reaction function as regards rate hikes. Overall CPI is expected to increase 0.3% versus 0.2% in November while core CPI is expected to increase 0.2%, matching the 0.2% increase in November. Year-over-year CPI is forecast jump to 2.1% versus 1.7% in November while Core CPI is expected to remain at 2.1% for the third straight month. If those levels are hit it likely stays the Fed’s hand in February but would keep March slightly in play (26% odds of a hike) with June a much stronger rate hiking candidate (65% odds).
Later this morning, the monthly University of Michigan Consumer Sentiment Survey will be released and is expected to show an uptick in confidence but probably not to the degree the NFIB Small Business Optimism Survey showed earlier this week. The sentiment figure is expected to improve slightly to 98.5 versus 98.2 in December with 1-year inflation expectations forecast at 2.2% and longer term 5-10 year inflation expectations are expected at 2.3%. The Fed focuses nearly as much on inflation expectations in sentiment surveys as it does objective measures, especially now with labor market expectations having largely been met. Survey measures of inflation matter to the Fed because they want to see them well-anchored and not drifting materially higher. Much Fed literature has been written that inflation levels are often driven not just by supply and demand pressures but also by the self-fulfilling prospect of inflation expectations.
University of Michigan Sentiment & Inflation Expectations
The University of Michigan Sentiment Survey contains the headline consumer confidence reading, that hit a 13-year high last month, and it also provides inflation expectations that the Fed closely follows in addition to other objective inflation measures. The sentiment survey (white line) is expected to move slightly higher to 98.5 which would be another 13-year high, while longer-term inflation (orange line) is expected to be near 2.3% which is an all-time low reading for the series.