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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%.
…
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.
…
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.

This entry was posted on Wednesday, January 18th, 2023 at 10:52 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.