The US reported October retail sales on Wednesday. With the promising numbers that we had, we could see that retail sales could outpace the monthly rise in prices for the first time in several months. As it was expected, Retail sales rise by 1.3%. Core retail sales also raised by 1.3% in October, which is 1% more than the 0.3% estimates. With decreasing inflation in recent months and increasing retail sales, now we can guess that the Fed’s expectation for a soft landing can seem logical.
The overall number is inflated by rising spending on gasoline, but still, the upward move is clear.
On Tuesday US session, October PPI recorded only a 0.2% raise, consistent with the September raise, but much less than the 0.4% market expectation. On an annual scale, PPI fell to 8%, lower than the 8.3% of expectations. Core PPI also cooled, recording 0% every month, and 6.7% on an annualized. These data confirm the peaking inflation, and market expectations from Fed to slow down the rate hike pace. In direct reaction in the bond market, the yield on the 10-year US treasury hit a six-week low since October 6. The yield on the 2-year bonds, which is more sensitive to the rate hike policy, fell further (4.32%) and approached the monthly low of 4.30%.
On the geopolitical front, with reports about the missile explosion in Poland overnight, Asian stock markets decreased a bit. However, later Russia denied allegations of the bombing, but also said it will continue its military operations against Ukraine. There is still no sign of easing up in international military conflicts, on the contrary, they may intensify. As a reaction to the beginning, the news sparked renewed risk-off sentiment and increased the demand for the greenback pushing the USD index back to 107.12 from yesterday and a two-month low of 105.29. Today with cooling the geopolitical tensions and US promising economic data, the US dollar again decreased,
But what can make us think twice is yesterday’s Fed reports about US consumer behavior. According to data released on Tuesday by the NY Federal Reserve, most parts of the US Households are based on credit. Therefore, overall US Households’ overall debt raised by $351 billion in the third quarter. That confirms an increase of 8.3% from a year earlier, which is the biggest annual increase since a 9.1% jump in Q1-2008 at the start of the 2008-2009 recession. If households continue drawing down savings and accumulate debt to spend, then the economy can go towards another trouble.
These numbers once again confirm that tightening policies that the Fed had so far from the beginning of 2022, could cool down the inflation, but at the same time, the US economy did not hit so hard. The Federal Reserve has raised short-term interest rates from a 0.25% earlier this year to 4.00% at present; the fastest increase in short-term borrowing costs since the 1980-1982 tightening cycle. Now there are two choices, to slow down the tightening policies and measures, or continue the same pace as long as we get closer to the Fed inflation target. These doubts and uncertainty can prevent further bears’ move, as seen in the DXY chart recently.