February 18, 2021

Markets Today: US – more shopping, higher producer prices

There was a strong bounce back in US retail sales in January.

Today’s podcast


Overview:  The heat is on

  • US retail sales jumps 5.3% and core PPI 1.2% m/m. How’s that for the reflation trade?
  • Bond yields nevertheless pull back from Tuesday’s highs, equities modestly lower
  • Oil prices back higher after reports US crude output down 40%, even as Saudi plans to lift production
  • FOMC Minutes note is will be ‘some time’ before progress towards goals achieved
  • AU employment data this morning, China returns from LNY holidays

The heat is on, the heat is on, The heat is on, Oh it’s on the street, The heat is… on – Glenn Frey

Well not in Texas and many other US States it isn’t

Albeit temperatures are now rising, but in the economy it is, where its been a case of ‘four from four’ with every US economic release exceeding expectations, in the case of January retail sales and producer prices by outsized margins.

Looking at markets though

Observers could be foreign for thinking that the US data came out on Tuesday not Wednesday, given US bond yields are lower than where we left them on Wednesday and the US dollar only marginally higher.

Equities haven’t liked the data, playing to overheating and hence inflationary fears, the S&P 500 currently down about 0.2% with an hour of NYSE trade to go.

Old school official data is coming back into fashion

Hot on the heels of the latest COVID-19 relief bill signed into law at the end of December and which put more cash into Americans’ pockets, January retail sales jumped by 5.3%, far above the consensus, with sales ex-autos +5.9% and the control measure (more relevant for GDP) up a heady 6.0% against 1.0% expected.

Our friends at Pantheon Economics note

The surge in sales was concentrated in big-ticket items, particularly furniture (+12.0%) and electronics (14.7%), suggesting that some of the latest round of one-time stimulus payments found its way to retailers quite quickly.

But other retailers did well too

With internet sales up 11.0%, clothing up 5.0%, and general merchandise up 5.5%.

February seems bound to see a correction, especially given the Arctic weather and as new restrictions came into effect following President Biden’s inauguration. Yet if the Biden administration’s proposed $1.9tn new COVID-19 relief bill or something close to it gets approved by mid-March, currently planned to include $1,400 stimulus cheques, another surge in spending is to be expected.

On the inflation front and where ‘overheating’ concerns related to the ongoing reflation trade have come to the fore in recent days, the producer  price figures fed this fire, with headline PPI l+1.3% against the 0.4% consensus and the core (ex-food and energy) measures +1.2% against 0.2% expected, lifting the annual rate to 2.0% from 1.1% in December.

Strength here was broad based across good and services, with core goods prices now +2.3%.

A 1.5% jump in prices for light trucks led the way, automakers seemingly capitalizing on strong demand from private buyers.

The other two US releases overnight also exceeded expectations

Industrial production rising by 0.9% versus 0.4% expected, and the NAHB Housing Market Index rising to 84 from 83 (unchanged expected).

We also had Canada’s inflation figures, where CPI had some small ‘overs an unders’ versus expectations (the ‘Common’ yr./yr. rise unchanged at 1.3% against 1.4% expected but the Trim measure 1.8% from 1.6% and 1.6% expected).

UK headline and core CPI were both a tenth higher than expected at 0.7% and 1.4% yr./yr. respectively.

January FOMC meeting Minutes just released reveal “Participants judged that it was likely to take some time for substantial further progress to be achieved,” (by way of prelude to tapering its current $120bn per month of bond purchases).

The Minutes also note

The Fed’s tools, including the overnight reverse repo facility and interest on excess reserves rate would continue to provide “effective control” over fed funds and other overnight money-market rates, even if “more notable downward pressure emerged.” This is an acknowledgement that reserves are likely to rise  rapidly through the summer, reflecting ongoing Fed asset purchases, as well as expected declines in balances held in the Treasury General Account, with the Fed then set to counter the downward pressure this puts on the funds rate.

One might have expected US Treasury rates to push still higher after the reports

But the US 10-year rate is currently down to 1.29-1.30% (having ben as low1.27%) after touching its highest level in a year yesterday of 1.33%. Perhaps some sign of exhaustion after significant selling pressure and now a backdrop of weaker US equities.  The S&P 500 is -0.2% with an hour rot go and the NASDAQ -0.8%.


The USD has pushed on a little from its APAC closing levels, DXY currently 0.5% up on the day and BBDXY +0.3%.

All G10 currencies are weaker versus the USD save JPY where USD/JPY has pulled back below Y106 in conjunction with the fall back in US Treasury yields.

AUD is little changed from where we left it on Wednesday, near 0.7750.

Yesterday RBA Assistant Governor Kent today re-iterated the RBA’s estimates of the exchange rate being as much as 5% lower than otherwise (in trade-weighted terms) due to the Bank’s policy measures that include the recently extended QE program. Dr Kent said, “historical relationships with commodity prices would have implied a much larger appreciation of the Australian dollar than what’s actually occurred” and that the AUD is “currently around the upper end of its range in recent years”.

We’re not convinced the impact of the RBA’s actions is as much as 5%, but the point is that if the RBA is convinced it is, then it shows how reluctant they will be to cease them in turns of how much they might then far the currency will rise.

Commodity prices are very mixed

With aluminium, oil and iron ore higher but copper and zinc lower while gold is off more than 1% despite the softer USD (bitcoin’s latest rise to now above $51,000 probably the key factor here, as well as Wednesday’s rise in real US bond yields which our commodities expert Lachlan Shaw note has a strong  (negative) correlation with the gold price..

Oil was down earlier in the night following reports that Saudi Arabia plans to increase its oil output in the coming months, reversing a recent big production cut, according to advisers to the Kingdom.

Recall Saudi surprised oil markets last month when it said  it would unilaterally slash one million barrels a day of crude production in  February and March in an effort to raise prices, but now the Kingdom plans to announce a reversal of those cuts when a coalition of  oil producers meet next month, the advisers said, in light of the recent  recovery in prices.

The output rise won’t kick in until April, given the Saudis already have committed to stick to cuts through March (Dow Jones reporting).

This news has since been overwhelmed by a Bloomberg report in the last two hours saying total U.S. oil production has plunged by close to 40% – the most ever – as the unprecedented cold blast freezes well operations across the central U.S ‘according to traders and industry executives with direct knowledge of the operations’.

Crude output has now fallen by more than 4 million barrels a day nationwide, they said, asking not to be identified because the information isn’t public.  Before the cold snap, the U.S. was pumping about 11 million barrels a day.

Coming up

  • Australia has the January Labour Force survey.  Consensus is for +30k jobs and for the unemployment rate to tick down one-tenth to 6.5% from 6.6%. NAB sees upside risks and has pencilled in an above consensus print of +50k jobs and a fall in the unemployment rate to 6.4%. Supporting the case for a strong print was the PM announcing that JobSeeker numbers fell 100k in January, while the JobKeeper program may have kept some people employed who would have normally been seasonally retrenched in the holiday period
  • China’s return from a 5-busines day LNY holiday will see particular focus on the USD/CNY, after what has now become a quite common occurrence for SD/CNH to trend don during the holiday only for the PBoC, via the CNY fixing, to pull it back up post-holiday
  • Offshore this evening with get EU consumer confidence, US jobless claims, housing starts and the Philly Fed survey​​​​​​​

Market prices

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