Investors continue to heavily debate the Fed’s next few moves as the US economy shows few signs of cooling. On top of higher-than-expected job gains in January as well as inflation delivered by the Consumer Price Index on Tuesday, Wall Street is now digesting stronger than expected Retail Sales, which rose +3.0% in January.

Economy in detail 

Every single category showed a monthly gain, led by a +7.2% surge in sales at food services and drinking places, up +24% in January of this year compared to January of last year.

Obviously, Covid was ripping fairly well during January of last year and not nearly the worry this January, so that helps explain the big jump higher, but it also shows that the US consumer must not be struggling too much if they are wanting to still go out and spend.

On the plus side, strong consumer spending and continued job growth (over +500,000 in January) are all signs that the Fed has been correct in its belief that the US economy can withstand tighter financial conditions created by the central bank’s steady rate hikes.

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The downside however is that inflation is likely to remain stubbornly elevated as long as consumers are still spending at a healthy clip and the job market stays hot. Meaning the disinflation that bulls have been anticipating could be a long process. 

Real Estate

Services remains the thorniest area with shelter prices having a heavy influence. An index of rental prices produced by Zillow found that asking rents declined in October, November, and December 2022, the last months for which data was available.

Zillow says the government’s rent metrics tend to lag its rental index by about a year. Home sales have a similar lag. Interestingly, some economists are wondering if the government’s home price metrics could be “broken” since there are so few homes being sold, which could in turn work to keep American home prices from declining.

For the week ending February 4, home inventory was up by +70% compared to last year as “buyers just aren’t biting,” according to New listings are slowing down too, dropping -11% in response to low buyer interest.

Fewer buyers is due to the combo of high home prices and high mortgage rates. Median listing prices were sitting around $400,000 in January, while mortgage rates had pushed to 6.62% by Tuesday afternoon, up from a low of 5.99% at the start of the month, according to Mortgage News Daily. There is some worry that continued Fed tightening could lead to a collapse in the housing market, though the severity differs depending on who you ask.

Most real estate analysts still expect a drop of 10-15% this year but even that level of “correction” would leave median home prices up as much as +30% or more compared to 2020. Notably, those forecasts generally assume mortgage rates stay below 7%. It’s worth noting that inflation for goods is now below the Fed’s +2% target rate.

For the three months ended January, core goods prices actually fell at an annualized -2.1% rate, which has helped contribute to the overall slowdown in inflation. Economists are skeptical that goods prices will fall much more, though, as inventories and demand come back into balance. The caveat is potential recession which many still anticipate the economy will slip into by the second half of this year.

A recession would push up unemployment and effectively quash demand for everything, which could obviously pull inflation back pretty swiftly. I should mention that the Congressional Budget Office said yesterday that it expects the US economy to stagnate this year with the unemployment rate jumping to 5.1%.

Data to watch

Other data today includes Housing Starts & Permits and the Philadelphia Fed Manufacturing Index.

There are also several Fed officials scheduled to speak today, including Cleveland Fed President Loretta Mester, who is among the more consistently hawkish central bank officials.

Today’s earnings highlights include Applied Materials, DoorDash, DraftKings, Hasbro, Hyatt Hotels, The Southern Company, and Vulcan Materials. 

US Economy Shows Signs of Cooling

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