US retail sales beat expectations in December

US retail sales beat expectations in December as they expanded 0.6% m/m, up from 0.3% in November and beating the predicted 0.4%. This was the biggest gain for the measure in three months, with broad-based gains with nine out of 13 categories seeing a rise, with department stores and e-commerce in particular boosted by the holiday period. Stripping out automotives, growth was still 0.4%, up from 0.2% the previous month. The US consumer was surprisingly resilient throughout 2023 but some of this strength is expected to ebb this year as high interest rates persist through H1 according to our forecasts, and any remaining pandemic-era savings are run down. The release of the Beige Book yesterday confirmed a strong end to the year in terms of purchases, although most reporting districts cited little change overall. US industrial production also surprised to the upside in December, gaining 0.1% and beating the consensus expectation of a 0.1% contraction.

UK CPI inflation came in at 4.0% y/y in December, up from 3.9% the previous month and exceeding the consensus prediction of 3.8%. Prices were up 0.4% on November. Core inflation also presented an upside surprise at 5.1% y/y, unchanged from the previous month but higher than the predicted 4.9%. Services inflation was the key driver of the upside surprise as it rose to 6.4% y/y, while alcohol and tobacco also accelerated following the increase in tobacco duty. Inflation is expected to slow from February onwards as base effects from energy prices become more favourable, enabling the Bank of England to start easing policy later in the year.

Today’s Economic Data and Events

17:30 US initial jobless claims, week to January 13. Forecast: 205,000

Fixed Income

• The strong retail sales data added to the pushback from Fed officials earlier in the week in driving down bets on imminent easing from the Federal Reserve. Yields on the 10yr UST closed up 4bps to 4.10% while the 2yr climbed 14bps to 4.3609%.
• There was pushback from key ECB officials around the aggressive market pricing of rate cuts, with president Christine Lagarde and governing council member Klaas Knot both talking to the media on Wednesday. German 10yr bunds climbed 6bps to 2.31%.

FX

• The dollar index continued to climb yesterday although at a far slower pace than on Tuesday. It ended the day 0.1% higher compared with the previous day’s 0.9% gain.
• Both GBP and EUR gained against the greenback as hotter than expected inflation in the UK and pushback from ECB officials diminished the likelihood of imminent cuts from the BoE or ECB. GBP added 0.3% to close at 1.2676 while EUR added 0.1% to 1.0883.
• Elsewhere, dollar strength persisted with the JPY losing 0.7% to 148.16 and commodity currencies also losing ground.

Equities

• Lacklustre Chinese GDP figures weighed on East Asian equities yesterday, with the Hang Seng dropping 3.7% and the Shanghai Composite ending the day 2.1% lower. In Japan, the Nikkei closed down 0.4%.
• Pushback from ECB officials on rate cuts weighed on European equity indices, with losses across the board. The composite STOXX 600 closed down 1.1% with the DAX and the CAC down 0.8% and 1.1% respectively. The upside surprise in UK inflation yesterday drove a similar narrative in the FTSE 100 which lost 1.5%.
• In the US, the strong retail sales data weighed on equity markets and all three key indices closed lower. The rate-sensitive NASDAQ fell 0.6%, as did the S&P 500, while the Dow Jones ended the day down 0.3%.
• Locally, the DFM added 0.2% while the ADX closed 0.4% lower.

Commodities

• OPEC left their oil demand growth forecast for 2024 unchanged at 2.25m b/d, slightly slower than the 2.46m b/d they estimated for 2023. Emerging economies, led by China and India, will provide a substantial boost to demand growth this year according to OPEC. They also provided an outlook for 2025, projecting global oil demand growth of 1.85m b/d with slower, but still positive demand, in emerging markets. For supply growth in 2024, OPEC projects 1.3m b/d of non-OPEC supply, largely down to higher US volumes.
• Brent futures closed down 0.5% to USD 77.88/b yesterday, while WTI added 0.2% to USD 72.56/b as poor weather disrupted operations there.
• The API reported a 483,000 bbl rise in crude inventories in the US last week.