Weak Data keeps the FED on Hold for longer

What You Need to Know Today

• US Eco data flies in the face of expectations – Retail Sales Plunge for December

• This is a complete disconnect - Does the gov't have it right?

• Weak Data keeps the FED on Hold for longer

• The ‘A' Team is too quiet for me – when will we hear something concrete?

OK – so here we go again.....and at some point it becomes an issue – are we there yet? Mkts are on the edge – Gov't reported that December US retail sales fell by 1.2% - a far cry from the +0.1% expectation and if you take out autos and gas – Retail sales fell by 1.4% even worse! The worst drop in 9 years! – leaving so many analysts ‘dumbfounded'. (And these are all Ivy League guys!) Causing Fed Governor Lael Brainard to declare that ‘downside risks are increasing'!

Now, not for nothing – this flies in the face of what all the chatter was about during the month of December and the holiday shopping season......On one hand they told us that we had a ‘blowout' holiday season – couldn't have been better! Breaking records left and right - Best season in years! And then yesterday the gov't reports that horrendous retail sales number? I don't know about you, but something stinks....there is a complete disconnect between what the data showed us in December and now what the ‘delayed' data is showing us in February – I say delayed because this report was delayed due to the recent gov't shutdown -

Do you recall the headlines in the days leading up and just after Christmas?

"Early Holiday Shopping Numbers on Track to Break Season Records" – Washington Post 12/26/18

"Holiday Cheer Hits Retail – With Strongest Seasonal Sales in 6 Years" – USA Today 12/26/18

"US Holiday Retail Sales Are Strongest in Years, Early Data Show" – WSJ 12/25/18

"US Shoppers Will Spend Over $1 Trillion This Holiday Season for the First Time Ever" Quartz 11/6/18

So then help me reconcile what they told us in December vs what they are saying now? In today's BB article – "US React: December Consumer Shock to Slam 4Q GDP Forecasts" – Yelena Shulyatyeva tells us that ‘plunging gasoline prices failed to boost discretionary spending amid the gov't shutdown and stock market turmoil – Consumers appear to have increased spending on just autos and building materials, while cutting on everything else." Tell that to the retailers that told us about how nearly everything was flying off the shelves – albeit at ‘sale prices' but the fact is – consumers were out there spending money.

Really? Come on – The gov't shutdown lasted from December 22, 2018 to January 25, 2019 – for anyone to blame the shutdown that lasted one week in December 2018 for the plunge in retail sales in December appears a bit of a stretch – no? These numbers do not reflect January Retail Sales – they are only for the month of December – so I must ask – How can the headlines on the day after Christmas be so ‘excited' suggesting that the holiday shopping season was a ‘blowout' and now the gov't tells us – "Well, Not so much!" The data is the same, no?

I get it – if you consider January numbers then that would be more understandable – but I am having trouble connecting the dots for December when all the indicators – all thru the season (Oct – Dec) suggested otherwise.....And if retail sales plunged that much in December – then what are they going to say about January -when the gov't shutdown was in FULL swing? And THAT my friends is the new debate...

The mkts – stunned with the news – initially sold off hard - futures reacted immediately and then the indexes got slammed as the bell rang....and then as if that wasn't enough – word started to spread that those trade talks in China – well – weren't going so well....and then it hit the tape (again).......Someone (was only identified as a ‘source') said we are still ‘far apart' on some of the issues....and the mkt got hit (again)......which brings up all those concerns (again)....how can they tell us that we are making progress with the trade talks and that DT was willing to extend the ‘deadline' to accommodate the progress and that the talks are going well and the ‘A' Team was going in to ‘seal the deal' – causing the global mkts to rally as hope remained alive....and now they are telling us that maybe we didn't make that much progress and that the talks weren't really going that well and that the ‘A' Team failed? I mean it's ludicrous.....Here is where I once again reiterate my stance – why say anything? Why get the algo's and the mkts all excited when you know damn well that the ‘collar and cuffs don't match'!

Now after that announcement – the WH was quick to correct it....Larry Kudlow – Sr Economic Advisor – told us that there is a ‘good vibe' to the talks -and that appeared to have settled that argument down (for now), the mkt stabilized and even fought back as the focus returned to eco data.....and with fresh tariffs about to be imposed on China in 2 weeks – many are now trying to lay out the odds of 1. A deal, 2. No deal, 3. Partial deal between the US and China. The sense is now that we will get a limited deal at best – as China may be unwilling to offer any major concession on forced technology transfer and intellectual property theft......and the clock ticks....

By the end of the day the Dow gave up 103 pts or 0.41%, the S&P backed off by 7 pts or 0.27%, while both the Nasdaq and Russell advanced by 6 pts and 2 pts respectively. And in another slap to the data – the Transports rallied by 40 pts or 0.39% - Another disconnect – because if retail sales plunged that much, then the transports should also be under pressure as they wouldn't be ‘transporting all that stuff'.....

Overnight – mkts in Asia were under pressure and stocks were lower.... – on top of the disastrous US eco data (which I think is overblown) China comes out with their own data – Chinese inflation data for January came in at 1.7% - below the 1.9% expectation – not a complete disaster but enough of more negative news to give the bears something to carry on about......Add in the ongoing trade talks that one day are optimistic and the next day pessimistic and you have a perfect recipe for weakness going into the weekend. Japan -1.13%, Hong Kong – 1.87%, China – 1.86% and the Australian bucked the trend rising by 0.11%.

In Europe – investors are taking it all in stride – mkt centers across the region are mixed – and Spanish PM Pedro Sanchez is to call a ‘snap' election after parliament rejected his ‘minority gov'ts' 2019 budget. European investors are not panicking at all – don't appear to be that concerned over US eco data yesterday and they are not throwing in the towel on US/Sino trade talks just yet as they remain in this wait and see mode – tired of being dragged up and down on a whim....FTSE +0.10%, CAC 40 + 0.47%, DAX – 0.29%, EUROSTOXX +0.23%, SPAIN +0.27% AND ITALY -0.09%

US Futures are taking a breather and moving lower – currently down 9 pts - on newly minted US economic concerns and the ongoing trade talks....no word yet about how it went on day 2 of the ‘A' Team discussions...plenty of speculation/rumor but everyone is being tight lipped at the moment. I am sure that there is more to come as the sun rises over the Atlantic in just an hour or so. By now you know that Donny is going to sign the bill to prevent another gov't shutdown – but then at the same time hold a press conference in the Rose Garden to declare a state of emergency of sorts as he lays out his plan to deal with the ‘national security and humanitarian crisis on our southern border'. And while this will not price stocks in the long run – this story will only add to the ‘negativity' building for today. Yesterday's losses took us below support at 2744 only to end the day just above it at 2745....and this morning's action has now taken us below it again as we test 2736...

Eco data includes Empire State manf – exp of 7, Industrial production of +0.1%, Capacity Util of 78.7% - if these numbers come in line then my sense is the yesterday's retail sales numbers will be nothing but a flash in the pan – and while not good – they will help to keep the FED at bay – and this will be somewhat helpful to the mkts. Look for downside support at the next trendline - 2695 – if the story continues to get more negative.....If these numbers are inline and we get some positive news out of the WH over trade then I think the mkt holds as we move into the weekend. If we don't get any news out of China as the day wears on – then expect that the algo's will push us lower going into the closing bell and the long weekend. Remember – mkts are closed on Monday for President's day.