Fundamental Analysis

Equities Dip as December Retail Sales Exceed Forecasts

  • The US reported a higher-than-expected rise in retail sales.
  • Traders’ expectations of a 25-basis-point Fed rate cut in March decreased to 55%.
  • UK’s annual consumer price inflation (CPI) rose to 4.0% in December.

On Wednesday, Wall Street equities closed lower as December US retail sales data beat expectations. These sales figures dampened hopes for an early start to the Fed’s rate-cut campaign in March. 

The optimistic sales report on Wednesday prompted economists to revise upward their growth estimates for the fourth quarter. Moreover, the report comes after solid employment and wage gains in December and a rise in consumer prices earlier in the month. As a result, investors are less confident in a March Fed rate cut.

Fed Governor Christopher Waller, on Tuesday, said the economy is “doing well,” allowing the central bank the flexibility to move carefully on monetary policy. 

US retail sales (Commerce Department)

US retail sales (Commerce Department)

There was a 0.6% increase in retail sales last month, exceeding the predicted 0.4% gain. Retail sales, primarily goods, rose 5.6% year-on-year in December. Following the data release, traders’ expectations of a 25-basis-point Fed rate cut in March decreased to 55%, down from around 60%. 

The Fed’s “Beige Book” report on Wednesday indicated little change in US economic activity from December to early January. Firms reported mixed pricing pressures and some signs of a cooling labor market.

In recent weeks, US equities have retraced some gains from the strong final two months of 2023. The S&P 500 remains about 1% below its record-high close in January 2022.

Meanwhile, European equities declined on Wednesday as more hawkish remarks from ECB officials reduced rate cut expectations. Poor economic data from China further hurt investor sentiment. 

ECB President Christine Lagarde and Dutch central bank chief Klass Knot cautioned about expecting rate cuts soon. Although a pause in rate hikes is anticipated for the January meeting, money markets still estimate 150-basis point cuts in interest rates this year. 

Chinese economic growth in the fourth quarter missed expectations, reducing risk appetite. Meanwhile, Eurozone inflation in December stood at 2.9% annually.

Britain’s FTSE 100 hit a seven-week low on Wednesday after a stronger-than-expected UK inflation reading reduced hopes of early interest rate cuts. Disappointing data from China also impacted commodity-linked stocks. UK’s annual CPI rose to 4.0% in December, beating economists’ estimates.

UK inflation remains stubbornly high, making an early rate cut unlikely. Consequently, traders now estimate a more than 50% chance that the BoE will maintain rates in May.