Retail sales, producer price data suggest cooling economic activity

Key data shows positive signs for the battle against inflation as economic activity slows

Last week, investors received positive news as key inflation data suggested the U.S. economy is responding to the Federal Reserve’s hyper-aggressive tightening policies. The producer price index (PPI), a measure of input costs of goods and services for businesses, fell dramatically by 0.5% in December. The decline, which represents the largest month-over-month movement since April 2020, easily surpassed estimates of a 0.1% softening. On an annual basis, headline PPI rose 6.2%, the lowest annual rise since March 2021 and considerably less than the 10% annual increase corporates experienced in 2021.

December retail sales data also declined 1.1% compared to estimates of -0.8%, representing the largest monthly decline in over a year. The figure caps a muted end to the holiday spending season with November and December spending data lagging, suggesting that consumers are becoming increasingly conservative with their household budgets as interest rates remain at multi-year highs. Yields on the U.S. 10Y note bottomed at 3.4% on the news.

The data suggests that the U.S. economy is cooling as per the designs of the Federal Reserve. Money markets anticipate the central bank to slow its pace of rate tightening as a result, as investors priced in a 95% chance that the central bank raises its key lending rate in February by 25 bps.

Dollar softening boosts Eurozone and APAC currencies

Foreign currency markets also responded to positive U.S. inflation data, prolonging a month-long period of relative U.S. dollar softness. The Euro eclipsed $1.08 last week in response, its highest level in over eight months. Investors flocked to European assets as markets anticipate the Fed will slow its pace of interest rate tightening in the coming months, while Eurozone inflation data also came in weaker than expected.

Across the English Channel, sterling rallied to $1.23 on a positive British CPI report and news that UK unemployment remains at 50-year lows. APAC currencies also strengthened, as the Japanese yen traded at 128 against the dollar on potential Bank of Japan and defense policy shifts.

The week ahead

Investors will continue to monitor data for further insight into the overall health of the economy and whether a recessionary slowdown is on the horizon. Notably, all eyes will anxiously focus on the FOMC’s February 1 meeting where markets currently anticipate a 25 bps rate hike by Fed officials. Earnings season also continues for corporates with several Fortune 500 companies reporting Q4 2022 metrics this week.

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