January Rally Pauses…..
U.S. equities finished noticeably lower, paring some of the solid gains seen year-to-date. Investors processed a slew of mixed economic data, as retail sales fell more than expected, producer price inflation cooled, industrial production dropped more than anticipated, homebuilder sentiment unexpectedly improved, mortgage applications jumped, and business inventories rose as expected. Meanwhile, in afternoon action the Fed released its Beige Book, showing little change in activity from its last report. News on the equity front was mixed, as United Airlines topped Q4 estimates, and an optimistic outlook from J.B. Hunt took some of the sting off its earnings miss, while Moderna announced upbeat results from a key trial of its RSV vaccine. Treasury yields were lower, and the U.S. dollar was nearly unchanged, while crude oil prices lost steam throughout the day to finish lower, and gold traded to the downside. Asia finished mostly higher, and European markets were mixed, after the Bank of Japan held its monetary policy steady and offered dovish commentary.
The Dow Jones Industrial Average tumbled 614 points (1.8%) to 33,297, the S&P 500 Index fell 62 points (1.6%) to 3,929, and the Nasdaq Composite declined 138 points (1.2%) to 10,957. In moderate volume, 4.2 billion shares of NYSE-listed stocks were traded, and 5.2 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.70 to $79.48 per barrel. Elsewhere, the gold spot price was down $4.10 to $1,905.80 per ounce, and the Dollar Index was nearly flat at 102.42.
Retail sales fall and producer price inflation cooler than expected…..
Advance retail sales for December were down 1.1% month-over-month (m/m), below the Bloomberg consensus forecast of a 0.9% decrease, and compared to November’s negatively revised 1.0% gain. Last month’s sales ex-autos also dropped 1.1% m/m, compared to expectations of a 0.5% decline and as November’s figure was adjusted lower to a 0.6% decrease. Sales ex-autos and gas fell 0.7% m/m, versus estimates of a flat reading, and compared to November’s negatively adjusted 0.5% decline. The control group, a figure used to calculate GDP, also decreased 0.7% m/m, versus projections of a 0.3% drop, and following the prior month’s unrevised 0.2% dip.
The Federal Reserve’s industrial production declined 0.7% m/m in December, compared to estimates of a 0.1% dip, and versus November’s negatively revised 0.6% decline. Manufacturing and mining output both fell, more than offsetting a rise in utilities consumption. Capacity utilization declined to 78.8%, versus estimates of a slight uptick to 79.5% from the prior month’s downwardly revised 79.4% rate. Capacity utilization remained near its long-run average.
The National Association of Home Builders (NAHB) Housing Market Index (HMI) showed homebuilder sentiment unexpectedly improved in January. The index rose to 35 from December’s unrevised 31 level, where it was expected to remain. This was the sixth-straight month that homebuilder sentiment was below 50—which suggests poor conditions. The depressed sentiment has come amid the backdrop of rising interest rates and elevated home prices, which have caused affordability to plunge, as well as elevated materials and labor costs. However, the NAHB noted that, “It appears the low point for builder sentiment in this cycle was registered in December……The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.”
In other housing news, the MBA Mortgage Application Index jumped 27.9% last week, following the prior week’s 1.2% gain. The index spiked and rose for a second week in a row as a 34.2% increase in the Refinance Index was met with a 24.7% gain for the Purchase Index. The sharp upturn came as the average 30-year mortgage rate moved 19 bps lower to 6.23% but remains is up 259 bps versus a year ago.
Business inventories rose 0.4% m/m in November, matching forecasts, after October’s downwardly revised 0.2% advance.
The Producer Price Index (PPI) showed prices at the wholesale level in December declined 0.5% m/m, versus estimates of a 0.1% dip, and cooler than November’s downwardly revised 0.2% increase. The core rate—excludes food and energy—was 0.1% higher m/m, in line with estimates, and versus the prior month’s downwardly adjusted 0.2% gain. The headline rate was 6.2% higher y/y, south of expectations of an 6.8% increase, and compared to the prior month’s downwardly adjusted 7.3% rise. The core PPI was up 5.5% y/y last month, below the estimated 5.6% rise and compared to November’s unrevised 6.2% growth rate.
In afternoon action, the Federal Reserve released its Beige Book—an anecdotal read on business activity across the nation used by the Fed to prepare for the next monetary policy decision slated for February 1. The report indicated that overall economic activity was relatively unchanged from its last installment. Five of the Fed Districts noted modest increases in activity, while six showed no change and one District saw a slight decline, with most areas expecting little change to growth ahead. Consumer spending rose marginally, but inflation remained an overhang on purchasing power. Meanwhile, manufacturers saw a modest decline in activity, and the housing markets continued to weaken, while employment grew at a moderate pace across most Districts.
Treasury rates were lower, as the yield on the 2-year note declined 11 bps to 4.09%, the yield on the 10-year note lost 15 bps to 3.38%, and the 30-year bond rate decreased 10 bps to 3.54%.
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