Daily Market Color

Rates Turn Lower Despite Surprising Retail Sales Figure

Rates/yields take a breather from the recent selloff
While January’s retail sales figure rose past expectations, rising inflation expectations continue to weigh on market sentiment.  Major US equity indices were mixed on the day – the DJIA rising 0.3% to its ninth record close of the year, while the tech-heavy Nasdaq declined 0.6%.  Treasury yields and swap rates fell 1-6 bps across the curve – the 10-year UST yield closed 4 bps lower at 1.27%
January PPI index rose 1.3% from 0.3% the month prior, the largest increase since 2009
Over the past 12 months, PPI has increased by 1.7%, nearing pre-pandemic levels (~2%).  Much of the increase was driven by rising health care and energy prices.  Core PPI – which excludes food, energy, and trade services – rose 1.3% last month, while the Y/Y rate hit 2%, almost doubling December’s 1.1%.
Retail sales rose 5.3% last month after falling 1% in December
The figure was well above the 1.2% expectation as stimulus check spending drove sales significantly higher.  Gains were distributed across all major sectors, with electronics and appliances clocking in the largest monthly increase at 14.7%.
FOMC minutes reveal Fed officials have a stronger economic outlook for this year relative to December’s forecast
The minutes for the January FOMC meeting detail that officials are projecting inflation to cross the 2% threshold in the second half of 2021 and remaining there till 2023.  The impending fiscal stimulus package is expected to be the main driver of economic growth, but officials believe COVID-19 could still “pose considerable risks to the economic outlook, including risks associated with new virus strains, potential public resistance to vaccination, and potential difficulties in the production and distribution of vaccines.”

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