PrefBlog

US retail sales were poor in December:

Retail sales fell in December, highlighting how consumers’ concerns about inflation became the defining factor of the holiday shopping season.

U.S. retail sales fell 1.1 percent from the month before, the Department of Commerce said on Wednesday. While the data is adjusted for seasonal variations, it does not account for price changes, and inflation continued to ease during December, which would have contributed to the decline.

Retail sales in November were also revised to show a fall of 1 percent from October, worse than the 0.6 percent decline originally reported.

Sales were down in December at popular holiday shopping destinations like electronics stores, car dealerships and clothing outlets. Department stores posted a 6.6 percent decline from the previous month.

… and bond yields gapped lower:

Stocks and bond yields fell on Wednesday after weak U.S. economic data rekindled fears about a looming recession, snapping an eight-day winning streak for the TSX. While equity losses were minor in Canada, it was the worst day in more than a month for the S&P 500 and Dow Jones Industrial Average.

Moves were particularly notable in credit markets, where the benchmark U.S. 10-year Treasury yield fell 16 basis points to its lowest level in four months. Canada’s five-year government bond yield – a key indicator for where fixed mortgage rates are heading – fell to its lowest level since last August.

By late afternoon, Canada’s five-year bond was yielding 2.809%, down about 12 basis points. Last October, it was yielding close to 3.9%.
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U.S. producer prices also fell more than expected in December as the costs of energy products and food declined, offering more evidence that inflation was receding. Canadian producer prices were also lower in December. They fell 1.1% from the previous month, while the annual rate of growth eased to 7.6% from 9.4%. This follows data on Tuesday showing that consumer prices in Canada rose at the slowest annual pace since February last year.
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A Fed report on Wednesday also showed that there were some encouraging signs U.S. inflation pressures and labour shortages were easing, but economic activity was tepid as the central bank’s actions weigh on growth.

St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester on Wednesday stressed on the need to raise rates beyond 5% to bring inflation to heel.

And late in the afternoon, Philadelphia Federal Reserve President Patrick Harker said that he expects the Fed to raise rates a few more times this year although he reiterated earlier comments that he’s ready for the U.S. central bank to move to a slower pace of rate hikes due to signs of cooling inflation.

The Fed commentary also highlighted the disparity between the U.S. central bank’s estimate of its terminal rate and market expectations, which were of the rate peaking at 4.88% by June.

Traders are pricing in a lower rate than Fed officials are signaling as they question whether the U.S. central bank will continue to hike or hold rates at restrictive levels if the economy suffers. Traders are now betting on a 25-basis point rate hike in February.

… and UK inflation was off its peak, but still high:

The rate of inflation in Britain slowed for a consecutive second month in December, but was still running in the double digits, maintaining a tight squeeze on household finances.

Consumer prices rose 10.5 percent in December from a year earlier, down from 10.7 percent the previous month, with rising food prices and prices at hotels and restaurants offsetting lower gasoline and clothing prices, the Office for National Statistics said on Wednesday. Food and nonalcoholic drink prices rose 16.8 percent in December from a year earlier, slightly faster than the previous month.

The overall declines come after inflation hit a 41-year high in October, at 11.1 percent.

PerpetualDiscounts now yield 6.00%, equivalent to 7.80% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.11% on 2023-1-6 and since then the closing price has changed from 15.04 to 15.67, an increase of 419bp in price, with a Duration of 12.24 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 34bp since 1/6 to 4.77%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to about 305bp from the 300bp reported January 11.

Canadian inflation was OK:

Canada’s inflation rate eased in December, thanks largely to a plunge in gasoline prices, in what is an encouraging sign for the Bank of Canada as it mulls further increases in interest rates.

The Consumer Price Index (CPI) rose 6.3 per cent in December from a year earlier, down from a 6.8-per-cent pace in the previous month, according to figures published Tuesday by Statistics Canada. Financial analysts were expecting an inflation rate of 6.4 per cent.

Consumer prices fell 0.6 per cent during the month of December, highlighted by a 13-per-cent plunge for gasoline, its largest decline since the early stages of the COVID-19 pandemic.

Excluding food and energy – two of the more volatile components of CPI – prices rose 5.3 per cent on an annual basis, a slight deceleration from 5.4 per cent in November.
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There were signs of weaker consumption in Tuesday’s report. Price growth for durable goods is slowing quickly. For example, the cost of household appliances fell 4.1 per cent in December, the largest month-over-month decline on record. Furniture price growth is also decelerating.
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At the same time, there are sticky aspects of inflation. Grocery prices rose 11 per cent in December on an annual basis, down from 11.4 per cent in November. Those prices are still growing near the highest rates in several decades, an ongoing frustration for consumers.

Mortgage interest costs have jumped 18 per cent over the past year, on account of the rapid rise in borrowing rates. (Some costs related to housing are declining.) Statscan also noted that prices for personal care supplies – including soap, cosmetics and other products – have risen by 9.9 per cent on an annual basis, the quickest pace of growth in nearly four decades.

The New York Fed’s SCE Household Spending Survey was consistent with all this:

• The median reported year-over-year increase in monthly household spending declined to 7.7 percent in December, down from its series high of 9.0 percent in August 2022. The decrease was broad-based across age, education, and income groups.
• The share of households that reported making a large purchase over the past four months decreased from 61.7 percent in August to 56.4 percent in December. While the share of those making large purchases on home appliances, electronics, and furniture rose in December, the share spending on vehicles, home repairs, homes, and vacations fell.
• The median expected monthly overall spending growth over the next twelve months declined to 4.0 percent from 4.4 percent in August, its lowest reading since April 2021. The decrease was most pronounced for those with household incomes over $100,000.
• The median expected year-ahead change in everyday essential spending (that is, daily living expenses) dropped from 5.6 percent in August to 5.2 percent in December, its lowest reading since April 2021, but above its pre-COVID levels. The median expected change in non-essential spending also declined from 1.8 percent in August to 1.7 percent in December.
• The average reported likelihood of making a large purchase over the next four months increased for home appliances and electronics, but decreased for furniture, home repairs, vacations, vehicles, and homes.

The December US inflation number was released:

Inflation continued to slow on an annual basis in December, providing welcome relief for American households and a positive development for policymakers at the Federal Reserve and White House.

The Consumer Price Index climbed by 6.5 percent in the year through last month, down from 7.1 percent in the November reading, as prices declined slightly on a monthly basis. The annual inflation rate was the slowest since October 2021, a pullback that came as gas prices dropped and airfares declined.

Economists and Fed officials are more acutely focused on a so-called core inflation measure, which removes food and fuel prices to get a sense of underlying price trends. That measure climbed by 5.7 percent in December from a year earlier, compared with 6.0 percent previously and in line with what forecasters had expected.
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Services costs could help to keep inflation higher than normal. Wage gains are rapid, and Federal Reserve officials are worried that this will prompt service providers — like hotels and day-care centers — to keep raising prices. December’s report showed increases in prices including sporting event admissions and pet services.

But overall real wages are still in decline:

Real average hourly earnings for all employees increased 0.4 percent from November to December, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from an increase of 0.3 percent in average hourly earnings combined with a decrease of 0.1 percent in the Consumer Price Index for All Urban Consumers (CPI-U).

Real average weekly earnings increased 0.1 percent over the month due to the change in real average hourly earnings combined with a decrease of 0.3 percent in the average workweek.

Real average hourly earnings decreased 1.7 percent, seasonally adjusted, from December 2021 to December 2022. The change in real average hourly earnings combined with a decrease of 1.4 percent in the average workweek resulted in a 3.1-percent decrease in real average weekly earnings over this period.

The Cleveland Fed reminds me that they have a Center for Inflation Research.

And the Newn York Fed published its Underlying Inflation Gauge:

• The UIG “full data set” measure for December is currently estimated at 5.4%, a 0.3 percentage point decrease from the current estimate of the previous month.
• The “prices-only” measure for December is currently estimated at 4.5%, a 0.5 percentage point decrease from the current estimate of the previous month.
• The twelve-month change in the December CPI was +6.5%, a 0.6 percentage point decrease from the previous month.
  • -For December 2022, trend CPI inflation is estimated to be in the 4.5% to 5.4% range, a slightly wider range than November, because of a larger decrease in its lower bound than in its upper bound.

TXPR closed at 580.54, up 0.76% on the day. Volume today was 1.82-million, well above the median of the past 21 trading days.

CPD closed at 11.55, up 0.78% on the day. Volume was 92,520, well below the median of the past 21 trading days.

ZPR closed at 9.59, up 0.63% on the day. Volume was 205,840, below the median of the past 21 trading days.

Five-year Canada yields were down 10bp to 3.16% today.

The omniscient pundits tell us:

U.S. stocks ended up sharply on Wednesday, with the S&P 500 and Nasdaq gaining more than 1% each as investors were optimistic ahead of an inflation report that could give the Federal Reserve room to dial back on its aggressive interest rate hikes. The TSX rose to its highest level in more than five weeks, led by a 2% jump in the real estate sector, attracting buyers as U.S. and Canadian bond yields declined.

The much-anticipated report due on Thursday is projected by economists polled by Reuters to show U.S. consumer prices grew 6.5% year-on-year in December, moderating from a 7.1% rise in November.

Benchmark stock indexes are up this year after falling sharply last year. Hopes that the Fed could soon ease back on its aggressive tightening after raising the federal funds rate seven times in 2022 have boosted the market in recent sessions, even as comments by some Fed officials have supported the view that the central bank needs to remain vigilant about raising rates to fight inflation.
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Canadian and U.S. government bond yields fell across a flatter curve. The 10-year was down 11.2 basis points at 3.008%, its lowest level since Dec. 21. That helped to give a boost to the real estate sector, made up of relatively high yielding securities that struggle when yields rise on competing investments in the bond market.

PerpetualDiscounts now yield 6.21%, equivalent to 8.07% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.11% on 2023-1-6 and since then the closing price has changed from 15.04 to 15.19, an increase of 100bp in price, with a Duration of 12.24 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 8bp since 1/6 to 5.05%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has declined to about 300bp from the 330bp reported January 4.