Retail Sales Miss Expectations, Strengthening The Case For A Less Hawkish Fed

Key Insights

• Retail Sales fell for the second month in a row. 
• U.S. dollar tested new lows after the release of the report. 
• The weak Retail Sales and PPI data suggest that Fed would not push rates above the 5.00% level in 2023. 

Retail Sales Decline By 1.1% In December

On January 18, U.S. released the Retail Sales report for December. The report indicated that Retail Sales declined by 1.1% month-over-month, compared to analyst consensus of -0.8%.  On a year-over-year basis, Retail Sales grew by 6%.

Excluding autos, Retail Sales declined by 1.1%, while analysts expected that they would decrease by just 0.4%.

The report highlighted the slowdown of the economy, which was triggered by high interest rates. In combination with the Producer Prices Report, which showed that PPI declined by 0.5% month-over-month in December, the report strengthens the case for a less hawkish Fed.

Today, traders will also take a look at the Industrial Production and Manufacturing Production reports. Industrial Poduction is expected to decline by 0.1% month-over-month in December, while Manufacturing Production is projected to decrease by 0.3%. It remains to be seen whether these reports will have a significant impact on market dynamics as traders will likely stay focused on the Retail Sales and PPI data.

U.S. Dollar Tests New Lows After Retail Sales Report

Not surprisingly, the weak Retail Sales data put additional pressure on the American currency. The U.S. Dollar Index tested new lows near the 101.75 level.

Treasury yields have also moved to new lows as bond traders bet on a less hawkish Fed. Traders believe that the Fed will not be able to raise rates above the 5.00% level in 2023.

The weak dollar and lower Treasury yields provided support to gold markets. Gold moved back above the resistance at $1915.

Interestingly, S&P 500 futures did not gain upside momentum after the release of the Retail Sales report and remained stuck in the 3990 – 4000 range. A less hawkish Fed is bullish for stocks, but traders look worried about the health of the economy.

For a look at all of today’s economic events, check out our economic calendar.