Retails sales dip and inflation pushes higher

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Published Date 2/14/2018

Inflation is getting more attention; the Jan CPI this morning a little hotter than forecasts. The core CPI was thought to be +0.2%, yr/yr +1.7%; as reported +0.3% and yr/yr +1.8%. Markets have increased concern recently that inflation will finally increase to the Fed’s 2.0% soon. In the meantime, an increase in the view that the Fed is behind the curve in increasing rates. Been a lot of opinions that the Fed would have to move four times in 2018, today’s Jan CPI added more concern. Inflation worries may be too fearful now. Four federal funds rate increases this year will cause the Fed to increase rates every other meeting, the first March 21st.

Jan and Dec retail sales, however, were weaker than estimates suggesting spending wasn’t as strong as expected. The sales report outwardly ignored by traders pushing the 10 yr note to 2.92% a new US high rate. Following in the footsteps of the CPI crude oil increased $1.60 today after declining $8.00 over the prior two weeks. Gold, an inflation hedge increased a $27.00.

The Atlanta Fed GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 3.2 percent on February 14, down from 4.0 percent on February 9. The nowcast of first-quarter real consumer spending growth fell from 3.0 percent to 2.0 percent after this morning's retail sales report from the U.S. Census Bureau and this morning's Consumer Price Index release from the U.S. Bureau of Labor Statistics. The slippage back to 3.2% is still above the survey from economists at 2.7%.

Dec business inventories expected +0.3% increased 0.4% matching the increase in Nov. December's build was centered among manufacturers where inventories rose 0.5 percent and also wholesalers at 0.4 percent. Retailers held down the total, up 0.2 percent for the fourth straight soft reading. Retail inventories are low, but given the softness and downward revisions to this morning's retail sales data, the need to build these inventories doesn't appear to be urgent.

Once the 10 yr moved to a new high today, MBS prices sank, down 48 bps for Fannie 4.0 coupon and down 29 bps from 9:30 AM EST this morning when investors set morning prices.

Tomorrow Jan PPI kind of an afterthought after the retail CPI data today. Feb NAHB housing market index, Feb Philly Fed business index and industrial production and factory use. PPI expected +0.4%, core +0.2%; NAHB housing market index at 72 unchanged from January; Feb Philly Fed business index 21.0 from 22.2 in Jan; Jan industrial production +0.2%, factory use 78.0% from 77.9% in Dec.

The 10 yr note is headed to 3.0%, 2.92% the high today. The bond and mortgage markets have been negative in our models and other technical indicators since mid-Dec.

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