HIGHLIGHTS OF THE WEEK
- Risk sentiment turned positive this week, as investors took developments related to the Covid-19 virus and a mixed bag of U.S. data in stride. Among the data reports, the NFIB survey indicated that American small businesses entered 2020 on solid footing, with the confidence measure gaining additional ground in January.
- The headline CPI measure rose to 2.5% y/y in January, while core CPI held steady at 2.3%. A level just above 2% for the latter implies core PCE inflation of roughly 2%, which would bring the Fed’s preferred inflation gauge closer to target.
- Retail sales data was less upbeat than expected. While the headline was bang on market expectations (+0.3 m/m), the control group – used to measure household consumption expenditures – was revised lower in December and came in flat in January, pointing to a soft entry into the first quarter.
A Mixed Bouquet
Investors had plenty of information (data and otherwise) to parse through this week. On the data front, the NFIB survey indicated that American small businesses entered 2020 on a solid footing. The confidence measure was up 1.6 points in January to 104.3 – a level that’s within the top 10% of historical readings. Under the hood, the most striking improvement was in sales volume expectations, which shot up 7 points to 23%. Interestingly, this came alongside a mild pullback in expectations about an ‘improvement in the economy’. This suggests that the improved sales view may be partially linked to the signing of the Phase One trade deal, with China’s pledge to boost imports from the U.S. having the potential to benefit small firms too, despite their heavier domestic tilt.
With a shortage of skilled workers and quality of labor concerns top of mind, small businesses continued to boost worker compensation in January, while signaling that they will continue to do so over the coming months as well. More wages pressures should put further upward pressure on inflation. The January CPI report appears to corroborate this narrative. Headline CPI ticked higher to 2.5% y/y in January, while the core measure held steady at 2.3% y/y (Chart 1). Core CPI inflation of just above 2% implies that core PCE inflation (currently at 1.6% y/y) should also trek higher, bringing the Fed’s preferred inflation gauge closer to target. This should give the Fed reassurance as they wait and assess the impact of past rate cuts and the risks to global economic growth from the new coronavirus (Covid-19) outbreak.
Retail sales data out this morning was less upbeat than expected. The headline was up 0.3% m/m, bang on market expectations. However, the control group, which excludes some of the most volatile categories, was flat in January, while the December gain was revised down to 0.2% from 0.5%. Despite a soft entry into the new year, and the added near-term headwind from reduced tourism as a result of the spread of the Covid-19 virus, we still expect consumption to advance at a decent clip this year. This view is underpinned by strong consumer fundamentals, including upbeat consumer confidence and still-sturdy job and income growth. A weakening trend in the (lagged) job openings data, however, raises some questions about the future pace of job gains. As of December, the pullback in job openings had become broad-based, both across regions and segments. A closer look at some of the details, however, paints a less concerning picture. The quits rate, for instance, remains elevated, which suggests that workers are still feeling confident enough to jump ship and follow better opportunities (Chart 2). As such, rather than signaling an impending downturn, the slowdown appears to be more consistent with easing employer demand and expectations of a more moderate pace of job growth going forward.
All in all, while this week’s data can be best described as a mixed bouquet (or bag), the U.S. economy appears to remain on decent footing – a view shared by Fed Chair Powell in his testimony to Congress this week. Still, the Covid-19 outbreak remains a major wildcard and bears careful watching.
Admir Kolaj, Economist | 416-944-6318
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