Cutting class: Data schools markets on timing of Fed rate cuts

CUTTING CLASS: DATA SCHOOLS MARKETS ON TIMING OF FED RATE CUTS

A swath of economic indicators unloaded on Thursday rudely refused to cooperate with rate cut optimists and instead painted a picture of softening demand, a tight labor market and frustratingly hot price growth.

First, receipts at U.S. retailers (USRSL=ECI) posted a weaker-than-expected rebound last month, rising by 0.6% from January's downwardly revised 1.1% slide.

Economists forecast a more robust 0.8% gain.

Scratching below the surface, spending on autos, building/gardening supplies, electronics and gasoline drove the upside, while home furnishings, clothes and non-store (e-commerce) weighed on the topline.

Food and drink services rebounded from an icy January, rising 0.4% on a monthly basis and 6.3% from February 2023.

So-called "control" or "core" retail sales (which excludes, gasoline, autos, building materials and food/drink services and is closely associated with the consumer spending element of GDP), was unchanged, defying analyst expectations of 0.4% growth.

Writing that the data "points to slower consumption growth" this year, Michael Pearce, deputy chief economist at Oxford Economics adds, "We expect consumption growth to remain close to that pace over the rest of the year."

The dreaded "i" word is next.

The Labor Department's producer prices report (PPI) (USPPFD=ECI) - which tracks the prices U.S. businesses get for their goods and services at the proverbial factory door - increased by a scorching 0.6% last month, double the consensus estimate.

Year-on-year PPI also leap-frogged over economist projections, rising 1.6% versus the 1.1% expected.

Core PPI, which excludes food, energy and trade services, cooled down to 0.4% from 0.6% on a monthly basis, but heated up to 2.8% from 2.7% year-on-year.

"The hotter than expected PPI print indicating that wholesale prices are edging higher," says Quincy Krosby, chief global strategist for LPL Financial. "For the data dependent Fed, this report isn't helpful for a market that demands a 2024 rate cut."

Indeed, financial markets are now pricing in 59.7% likelihood that the central bank will implement a 25 basis point reduction in the Fed funds target rate in June, according to CME's FedWatch tool.

The report is February's third of four major inflation indicators (the last one will be the Commerce Department's PCE report), and while the metric remains within 1 percentage point of Powell & Co's average annual 2% target, it offers a reminder that the last mile is likely to be a long and rocky one:

Next, the number of U.S. workers joining the unemployment line (USJOB=ECI) unexpectedly edged down last week to 209,000, landing 4.1% south of consensus and coming on the heels of the previous week's downwardly revised 210,000.

Ongoing claims (USJOBN=ECI), reported on a one-week lag, rose by 0.9% to 1.811 million, or 89,000 fewer than expected. But this follows a sharp 5.9% cut to the prior week's number.

Considering Fed Chair Jerome Powell has consistently called out the tight labor market as an obstacle to cooling inflation, consistently low claims data is bad news for the sooner-rather-than-later crowd.

"(The) healthy labor market and sticky inflation data have increased the risk the first cut comes later," says Nancy Vanden Houten, lead U.S. economist at OE.

Finally, the value of goods stacked in the store rooms of U.S. businesses (USBINV=ECI) was unchanged in January, following December's downwardly revised 0.3% gain.

Analysts expected a 0.2% increase.

(Stephen Culp)

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