Dow dropped 613, decliners over advancers 2-1 & NAZ fell 138. The MLP index was off 2+ to the 225s & the REIT index pulled back 5+ to 390. Junk bond funds edged higher & Treasuries saw very heavy buying which lowered yields. Oil slid back to the 79s & gold slid back 3 to 1806 (more on both below).
AMJ (Alerian MLP Index tracking fund)
![Live 24 hours gold chart [Kitco Inc.]](https://www.kitco.com/images/live/gold.gif?0.2180338269244485)
Markets are nearly certain the Federal Reserve
next month will take another step down in the pace of its interest rate
increases. Pricing today pointed to a 94.3%
probability of a 0.25 percentage point hike at the central bank's 2-day meeting that concludes Feb 1. If that holds, it would take the Fed’s benchmark borrowing rate to 4.5-4.75%. While the probability is little changed since late last week, economic data today
helped solidify the idea that after a succession of aggressive hikes — 4 consecutive 3-qtr point increases in 2022, at one point —
the Fed is ready to take its foot off the brake a bit more. The producer price index fell 0.5% in Dec while retail sales were off by 1.1%. Both indicate that Fed hikes are pulling down inflation & slowing consumer demand.
Markets fully price in quarter-point interest rate hike in February as inflation slows
Holiday sales came in below industry expectations, as shoppers felt pinched by inflation & rising interest rates, according to data from the National Retail Federation (NRF). Sales during Nov - Dec grew 5.3% year over year to $936B, below the major trade group's prediction for growth of 6-8% over the year prior. In early Nov, NRF had projected spending of $942-960B. The retail sales number excludes spending at automobile dealers, gasoline stations & restaurants, & is based on data from the Census Bureau. It covers the period from Nov 1 - Dec 31. The holiday sales gains include the impact of inflation, which drives up total sales. The consumer price index, which measures the cost of a broad mix of goods & services, was up 6.5% in Dec compared with a year ago. For retailers, the shopping season’s results reflect the challenges ahead. As Americans continue to pay higher prices for groceries, housing & more month after month, they are racking up credit card balances, spending down savings & having fewer $s for discretionary spending. Plus, retailers are following years of extraordinary spending. During the Covid pandemic, Americans fought boredom & used stimulus checks by buying loungewear, throw pillows, kitchen supplies, home theater systems & more. That translated to sharp year-over-year jumps in retail sales in the past 2 holiday seasons — a 14.1% gain in 2021 & 8.3% gain in 2020. On average, holidays sales have grown by 4.9% annually over the past decade. NRF CEO Matt Shay said those upward leaps were unsustainable, especially as people return to commuting, going out to dinner & booking vacations again. Plus, he said, Americans are paying higher prices across the board, from pricier rents to more expensive groceries. “It just signals that consumers continue to be cost-conscious,” Shay told CNBC. “They’re feeling it. They’re aware of the pressures of managing their daily, weekly, monthly expenses.”
Holiday sales fall short of expectations, set stage for tougher 2023 for retail
It’s the talk of the town. Transatlantic trade tensions are dominating conversations at the World Economic Forum this week. On the one hand, European officials are saying they will come up with more financial support for European firms. On the other hand, the business community is excited about green subsidies stateside & argue the EU needs to match what the US administration is doing. Ultimately, the pressure is on the European institutions — but the question is how far are they willing to go? It all started with Pres Biden's sweeping legislation — the Inflation Reduction Act. It was approved in Aug & includes more than $300B in spending on climate & energy policies. The plan was not very well received in Europe because it provides tax credits when consumers buy electric car vehicles made in North America. The concern for Europeans is that businesses will invest in the US rather than in Europe so they can qualify for the massive fiscal support. And they have gone as far as saying that the American legislation breaches intl trade rules. “It is a big elephant in the room ... it has shaken up the European Union, the discussion between politicians, civil society and even industry,” Ilham Kadri, CEO of Solvay, a chemicals company headquartered in Belgium, said. “The reality is that the Biden administration incentivizes, when Europe regulates — to put it black in white,” she added. The EU has been lobbying hard to ensure that European companies will be able to benefit from some of the tax incentives without needing to relocate. The US Treasury Dept issued guidance in late Dec that would allow EU companies to benefit from certain credits without needing to alter their business models. However, other guidance on how the legislation will be implemented is still outstanding, hence the continued conversations between European & American officials.
The threat of a transatlantic trade war is dominating Davos
Gold futures finished lower, giving up early gains seen in the wake of US data showing a slowdown in wholesale inflation & retail sales to finish lower. The end of Federal Reserve tightening is approaching but a shallow recession might not be supportive of inflows for gold as that might lead to a stronger $. Gold for Feb fell $2 to settle at $1907 an ounce.
Gold Futures Shake Off Early Gains to Finish Lower
Oil futures finished lower, with US prices below $80 a barrel. Prices had spent much of the session trading higher, buoyed by expectations for higher energy demand from China. However, oil turned lower following comments by St Louis Fed Pres James Bullard. Bullard suggested that despite cooling inflation data & soft retail sales, the Federal Reserve still needs to move quickly to get benchmark interest rates above 5%. That raised fears that the Fed may raise rates at the 50 basis point clip again. Traders have been concerned that aggressive US rate hikes could lead to a recession & lower energy demand. The US benchmark WTI crude for Feb fell 70¢ (0.9%) to settle at $79.48 a barrel.
U.S. oil futures settle back below $80 a barrel
Dow Jones Industrials
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