US Breaking News: PPI and Retails Sales Miss to the Downside, USD down, Stock up

US Market Alert: PPI and Retail Sales

• US Producer Price Index (PPI) beats estimates to the downside (-0.5% vs est. -0.1%)
• US retail sales dropped faster than anticipated in December (-1.1% vs est. -0.8%)

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Lower PPI adds Further Pressure on the Fed to Pause Hikes

US PPI data dropped more than expected in December. As the end consumer breathers a sigh of relief there was more good news to come from the data in the form of a revision of the November figure which corrected a supposed monthly price increase of 0.3% to 0.2%.

This, in what has become a long line of lower inflation (mainly CPI) prints, will certainly be up for debate at the Fed’s next FOMC meeting in February but it remains to be seen if general prices are trending low enough to meet the high bar of “compelling evidence” that the Fed has deemed appropriate before changing its monetary policy path.

Disappointing US Retail Sales Suggests a Challenging Trading Environment for 2023

At the start of earnings season for Q4, major US banks increased cash reserves in anticipation of a pick up in credit losses due to a challenging economic environment. It appears that December was challenging for consumers, resulting in retail sales declining 1.1% month on month, more than the 0.8% decline projected.

The drop was led by large declines from gasoline stations, motor vehicle and parts dealers, as well as nonstore retailers. Gas prices have been in decline for months now, contributing to a more generally observed decline in prices which has been seen via encouraging CPI data.

US Retail Sales and its Component Contributions

Source: Bloomberg , prepared by Richard Snow

Below is a further magnification of the components of the US retail sales report:

Graphic Representation of the Largest Contributors to US Retail Sales Price Declines

Source: Bloomberg, US Census Bureau, prepared by Richard Snow

Immediate Market Reaction

The US dollar dipped lower as the 10 year US Treasury yield continued to selloff. A lower dollar has been consistent with encouraging news on the inflation front as it suggest the Fed will be forced to abandon its current aggressive path of rate hikes.

US Dollar Basket (DXY) 5-min chart

The S&P500 initially dropped at the release of the news but has turned higher. On the one hand, lower inflation lifts equities as potentially looser economic conditions creates a more conducive trading environment for firms. On the other hand , the dismal retail sales data suggests that consumers are feeling the pinch even during the time of year synonymous with spending.

S&P500 Futures (E-Mini Futures) 5 min chart

--- Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX