With the usual caveat about “not reading too much into one month”, December retail sales (released on a four-week delay thanks to the shutdown) were an unmitigated disaster, apparently.
This is one of those times where market participants are left to ponder the relative merits of the old “bad news is good news” thesis when it comes to Fed dovishness. Obviously, the committee has gone out of its way since the November meeting to emphasize data dependence and when the data comes in soft, that argues for more “patience” (read: dovishness). Ostensibly, that’s bullish for risk assets.
Given that, there’s an argument to be made that you actually want to see some incremental weakness continue to come through in the data, lest a string of hotter-than-expected prints should cause Powell to rethink the January “pivot” which provided the spark that catalyzed the best start to a year for equities since 1987.
All of that said, you don’t want too much weakness when it comes to the data, because then you’re left to wonder whether the “imminent US downturn” story is more than just a “story”.
Seen in that light, the worst retail sales print since 2009 is a bit of bummer (see chart below). The 1.2% drop is so far below consensus that it’s hardly worth mentioning what consensus even was (but we’ll do it anyway – economists were looking for a 0.1% gain, and the most pessimistic estimate called for a 0.2% drop).
So much for the “Christmas sales were healthy” story. If the Fed was looking to justify the whole “patience” theme, that abysmal piece of news will certainly work.
That said, “bad news” is just “bad news” for the time being, because equity futures took a notable dive, even as bonds rallied and the dollar fell, with the latter two moves underscoring the extent to which foreboding economic data bolsters the case for dovish Fed policy. It seems highly likely that the shutdown and the worst December for stocks since the Great Depression weighed heavily on the consumer during the holidays.
In any event, when it comes to the Fed and bad data, we’re immediately reminded of what Morgan Stanley’s Mike Wilson said earlier this week when describing the divergence between expectations for rates and economic surprises. To wit:
We think Exhibit 8 makes this point powerfully by showing the huge separation between expectations for rate moves and economic surprise indices. We expect these series will move toward converging, and whether that is due to dovish expectations falling out of the market or economic surprises turning lower, we suspect that neither is a bullish signal for equities.