• January Retail Sales far outstrip forecasts, December declines larger than initial release.
  • Job creation surges in January and fourth quarter.
  • Fed minutes highlight inflation but do not signal change from FOMC.
  • Ukraine remains a wild card, invasion will trump economics, inflation.

For the moment Americans are depressed but consolable.  

Consumer sentiment last month was the worst in almost a decade but depression did not keep anyone home. Consumer spending saw the largest gain in ten months. In fact, if you leave out the four months of pandemic distortion, it was the biggest single month jump in consumption in three decades. A red-hot job market and the receding pandemic seem to have blunted the damaging impact of the highest inflation in a generation. 

The US economy has given the Federal Reserve reason to hope that it will be healthy enough to bear a strong dose of inflation medicine over the next year. Current expectations in the futures markets, and they change daily with the tensions in Ukraine, are for five 0.25% hikes in the fed funds rate by the December 14 Federal Open Market Committee (FOMC) meeting. The first increase will come at the March 16 conclave, but whether a quarter or half point is expected  depends on the latest bulletins from Kyiv and Moscow. 

US economy

Retail Sales rose 3.8% in January, nearly double the 2% consensus forecast and a sharp rebound from December's revised 2.5% loss, originally -1.9%. The Control Group jumped 4.8% last month, well ahead of the 1% estimate. The initial December release of -3.1% was revised down to -4. 

Retail Sales

FXStreet

Sales are not adjusted for price changes. The Consumer Price Index (CPI) rose 0.6% in January providing a rough estimate of the inflation contribution to the sales figures. 

Nonfarm Payrolls performed far better than expected in January. Employers hired 467,000 workers, triple the 150,000 forecast. More importantly, job creation in the fourth quarter nearly doubled when corrected by the Bureau of Labor Statistics’ (BLS) annual revisions. From 940,000 in the initial version, the BLS adjustments listed 1.894 million hires, 611,000 per month. The US labor economy is still short about 2.5 million positions from its February 2020 level.

Wages were also well advanced on predictions. Average Hourly Earnings (AHE) rose 0.7% in January from 0.5% in December. Though annual wages climbed 5.7%, consumers lost 1.8% in purchasing power to the 7.5% inflation rate.  

Average Hourly Earnings

FXStreet

Consumer Sentiment in the Michigan survey dropped to 61.7 in January, its lowest since October 2011 and well below the pandemic bottom of 71.8 in April 2020. 

American consumers are the US economy, accounting for about two-thirds of GDP. The revival of consumer spending in January after a 0.5% drop in the third quarter will be a relief to the Fed governors, indicating that inflation has not yet done extensive damage to consumer finances. 

 FOMC minutes

The minutes of the January 26 FOMC meeting were a pean to the Fed’s new price consciousness. Inflation was mentioned 73 times in the text, surely a record. Participants were recorded as favoring a significant reduction in the balance sheet given the “high level of Federal Reserve securities holdings.”  No suggestion was forwarded as to the timing or size of the expected reduction or whether it might be a passive roll-off or active sales. No clue was provided to the first order market question, will the March rate hike be 0.25% or 0.5%. 

Within the context of higher rates, the Fed is keeping open as many options as possible. 

Conclusion

 A sustained drop in US consumption, whatever its source, could make a Fed rate campaign against inflation difficult or impossible. If consumers pull back on spending and GDP falls, higher interest rates would quickly become untenable in a declining economy. 

So far US households have not retreated and the economy remains strong, 6.9% annualized in the fourth quarter. But inflation is a constant threat as it channels expenditures from discretionary to necessities. The tight labor market is the reason for consumer willingness to spend even if wages are steadily losing ground to inflation. 

Treasury yields have fallen modestly from their recent highs underlining the chief threat to the Fed’s rate program– the Russian dispute with Ukraine. 

Left to itself the US economy should be able to maintain more than sufficient growth this year to enable the Fed’s increases. However, a Russian invasion of Ukraine would send oil and commodity prices soaring and disrupt a still fragile global recovery, quite possibly fomenting a US recession while it stoked inflation.  

The Fed has every reason to keep a wary eye on Ukraine and cross its collective fingers. 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended Content


Recommended Content

Editors’ Picks

AUD/USD attracts some sellers below 0.6800 ahead of Chinese data

AUD/USD attracts some sellers below 0.6800 ahead of Chinese data

The AUD/USD pair trades on a weaker note around 0.6770, snapping the four-day winning streak during the early Asian session on Monday. The recovery of the US Dollar provides some support to the pair.

AUD/USD News

EUR/USD holds below 1.0900 as US political violence boosts US Dollar

EUR/USD holds below 1.0900 as US political violence boosts US Dollar

EUR/USD attracts some sellers around 1.0885 during the early Asian session on Monday. The major pair edges lower amid risk aversion, triggering a fresh bid of the US Dollar. The Eurozone May Industrial Production, July NY Empire State Manufacturing Index will be released on Monday, along with the Fed's Mary Daly speech. 

EUR/USD News

Gold edges lower near $2,400 on US Dollar rebounds

Gold edges lower near $2,400 on US Dollar rebounds

Gold price trades in negative territory near $2,405 on Monday during the early Asian session. The hotter-than-expected Wholesale price inflation in the United States for June weighs on the precious metal. 

Gold News

Shiba Inu erases losses from past week, eyes 18% gains

Shiba Inu erases losses from past week, eyes 18% gains

Shiba Inu traders are anticipating the roll-out of futures contracts, products like Exchange Traded Funds that could boost the asset’s utility. An IBC report shows the contract is expected to be listed post Monday, July 15.

Read more

Trump Assassination Attempt: Gold, stocks set to decline on Republican sweep speculation Premium

Trump Assassination Attempt: Gold, stocks set to decline on Republican sweep speculation

Fist in the air and on with the fight - that has been the historic picture that former President Donald Trump shortly after he survived an assassination attempt on his life. Trump was injured in his ear but seems to have come out stronger politically from the shocking political violence. 

Read more

Majors

Cryptocurrencies

Signatures