Equities and the dollar shrug off industrial production, retail sales, eyes on China and the US consumer

• Equities rise sharply on China trade talk optimism, dollar improves
• Michigan consumer survey jumps from January low
• Weakenss in January industrial production and December retail sales discounted

American equity indexes added to their totals for the eighth straight week as traders focused on the potential economic benefits from a US-China trade deal and returning consumer optimism while ignoring declines in industrial production and retail sales.  

President Trump's declaration of a national emergency on the southern border had little market impact as it is sure to garner a prolonged legal challenge. The dollar consolidated against the yen and tested 18 month highs against the euro.

Equities and the dollar

The Dow soared 1.75% higher ending at 25883.45 up 444.06 points while the S&P 500 climbed 29.87 points 1.08% to 2775.60. The euro was trading at 1.1272 in the late afternoon having opened at 1.1291 and slipped as low at 1.1234 the weakest it has been against the dollar since November 13th.  The dollar went to ground versus the yen around 110.50 having reached 111.13 on Thursday a six week high.

Chinese President Xi Jinping said that talks between the two countries will continue in Washington next week. Officials from the United States, Treasury Secretary Steven Mnuchin and Trade Representative Robert Lightizer were in the Chinese capital this week for continued discussions.  The nations are attempting to hammer out a trade deal before President Trump's March 1st deadline for additional tariffs on imported Chinese goods.  President Trump has said he is open to extending the deadline by 60 days if talks are going well. 

University of Michigan Consumer Sentiment

The University of Michigan consumer sentiment index for February, the first post-shutdown indicator, came in at 95.5 in a strong recovery from January’s 91.2 reading, the weakest in almost two years. The consensus forecast was 93.0. The measure of current conditions rose to 110.0 in February from 108.8 and the gauge for expectations climbed to 86.2 from 79.9.

FXStreet

The return of consumer sentiment to mid-year levels was a sign that any unease from the partial closure of the federal bureaucracy may rapidly dissipate.  Consumer sentiment over the two years since the 2016 election has been the strongest since the financial crisis and recession.

Industrial production and retail sales

Markets were not convinced by the considerably lower than expected January industrial production figures and December’s poor and all-important retail sales that US economic growth is weakening.  

Industrial production fell 0.6% in January. That was far below the 0.1% forecast and December’s increase was revised down to 0.1% from 0.3%.  In both months the weakness was in manufacturing. Extremely cold weather covered much of the country at the end of the month but for most of January temperatures were normal.  In four of the past five years industrial production has been negative in January.

The December retail sales report was so uniformly weak and in contrast to previously issued private sales figures that many analyst expressed varying degrees of doubt. 

The headline sales figure of -1.2% was far below the 0.2% forecast for the largest single month fall since September 2009.  Sales without automobiles came in at -1.8% also a huge miss of its 0.1% estimate.

The ‘control group’ number which excludes building materials, motor vehicle, gasoline purchases and food service and is the consumption component of the Bureau of Economic Analysis’ GDP calculation was -1.7% for December. This was the second biggest monthly drop in the 27 year series and far below the 0.4% median forecast.

In contrast to the Census Bureau report private sector accounts showed a different story.

The Redbook Index noted that same store sales rose 6% each week in December and the 9.3% yearly increase in the last week of December was the largest on record. The Redbook survey measures sales at retail stores that constitute 80% of the government’s retail sales report.

Amazon said previously that its holiday sales set a record and MasterCard reported a 5.1% increase over 2017.

The US Census Bureau which collected the retail sales data is part of the Commerce Department. A press release from Commerce accompanying the retail information said that “data collection and processing were delayed”.   

If this means that information from retailers was not available to the bureau or was incorporated in January numbers is not known. The plain fact that the bureau thought it necessary to mention that the collection process was affected by the shutdown makes a wary approach to the data understandable.

Will the real consumer please stand up?

With the labor market booming, wages and employment rising it seems counter intuitive that consumer would celebrate with a sharp cutback in holiday spending.

The AtlantaFed GDPNow estimate for the fourth quarter dropped to 1.5% largely based on the retail sales figures.

While it seems questionable that the US economy slowed sharply in the final quarter of the year or that the consumer suddenly became timorous with a robust job market, the truth of the matter, as they say, remains to be seen.