Sentiment mixed amid strong US sales, PPI data

Major US indices were mixed after both the retail sales and the produce prices data came in surprisingly higher than expected. The retail sales jumped 5.3% in January versus 1.1% expected by analysts, as the $600 checks distributed to households at the beginning of the year did their job. While the producer prices accelerated unexpectedly fast to 1.7% from 0.8% a month earlier, as the core PPI hit 2%.  

No wonder, the combination of solid retail demand and rising producer prices revived the inflation expectations and backed the reflation trade. The PPI data, especially, came as a warning that we could see a similar jump in consumer prices in the coming months and boost the expectations of an earlier-than-otherwise Federal Reserve (Fed) tightening. But the FOMC minutes released yesterday showed there is nothing to worry for now, the Fed will remain accommodative until conditions which would trigger a QE tapering are met, and that’s probably not before 2022. 

But, of course, the solid jump in retail sales could throw some barriers before Joe Biden’s $1.9 trillion fiscal aid package. If $600 checks resulted in a 5.3% jump in sales, what would $1400 checks do? Would an overly expansive fiscal policy result in a tighter Fed? If investors had to choose between a supportive government or a supportive Fed, they would choose supportive Fed without hesitation. Indeed, good sales is good for business, but cheap liquidity is good for stock prices. In fact, the actual price-to-sales ratio in S&P500 is at record-breaking high levels, which simply means that the valuations don’t really depend on sales, or earnings, or other fundamental metrics at the moment.  

Therefore, we shall see the continuation in the stock rally despite rising treasury yields, as long as there is no material threat to the Fed policy. 

Elsewhere, the picture is quite similar. The European Central Bank (ECB) meeting accounts will likely stick to its Pandemic Emergency Purchasing Program (PEPP) and reiterate that the risks remain tilted to the downside, but they are less pronounced. A statement of this sort could actually give a boost to the euro, despite policymakers warnings that they have tools in hand to halt the euro’s appreciation. But the US dollar will say the last word on the EURUSD level. The pair tested the 1.20 support following strong US sales data. A broader recovery in greenback could send the euro below the 1.20 mark. But from a technical perspective, the real battle will be fought near the 100-day moving average (1.1992), which has acted as a solid support since May 2020. 

Elsewhere, the stronger US dollar and rising long-term treasury yields weigh on gold. The price of an ounce eased to $1770 on Wednesday. The death cross formation on the daily chart, combined to bearish trend and momentum indicators hint at the possibility of a deeper downside correction in gold prices. But the rising inflation expectations should throw a floor under the gold’s decline. In this respect, Wednesday’s low could be a temporary dip for a renewed attempt on the $1800 mark.  

WTI crude, on the other hand, keeps rising on deepening energy tragedy in Texas, which left millions powerless. Oil supply dropped by 40%, a record high, largely enough to shake the global oil market in the short run. The API data showed a 5.8-million-barrel decline in US oil inventories last week, and the more official EIA data, due today, should confirm a jump as well. The rising stockpiles should continue given a boost to energy prices in the short-run, however, long-term players keep in mind that the Texas situation is temporary, the latest boost to oil prices should not lead to sustained medium-term gains.