MACRO: Upbeat US data raises inflation concerns

• Strong US retail sales figures
• US producer prices soar most since 2009

US Retail Sales rebounded sharply in January after citizens received additional pandemic relief money from the government. Retail sales rose 5.3 % MoM, following an upwardly revised 1.0 % decline in December, and beating analysts' expectations of a 1.1 % increase. It is the strongest gain since June, suggesting a pick-up in economic activity after being restrained by a fresh wave of COVID-19 infections late last year. According to the Commerce Department, biggest increases were seen in sales at electronics and appliance stores (14.7 %); nonstore retailers (11 %); furniture (12 %); sporting goods, hobby, musical instruments (8 %); and food and drinking places (6.9 %). Core retail sales which exclude cars, gasoline, building materials and food services which correspond most closely with the consumer spending component of gross domestic product, surged 6 %, rebounding from a 2.4 % fall in December.

The sharp spike in January wiped out all the declines in the past three months and led to the highest-ever rise in core retail sales (up 11.8%). Source: Bloomberg (via: zerohedge)

Along with sharp increase in retail sales, US Producer Prices also soared in January. Producer Prices rose 1.3 %, following a 0.3 % increase in December and well above market expectations of a 0.4 % gain. That is the biggest MoM jump in history, mainly due to a record 1.3 % rise in cost of services. Prices for final demand services less trade, transportation, and warehousing climbed 1.4 %, while the indexes for final demand trade services and for final demand transportation and warehousing services also moved higher, 1.0 % and 1.3 %, respectively. Meanwhile, goods prices moved up 1.4 %, the largest increase since May 2020, due to a 5.1% jump in energy cost. On a yearly basis, producer prices advanced 1.7 % in January, also beating market estimates of 0.9 %.

The surge in retail sales and producer prices raised inflation concerns that could send Treasury yields even higher. The yield on benchmark 10-year Treasuries rose again to 1.3%, the highest in a year. Today's readings also sparked a "good news is bad news" effect, which triggered declines in major indices. Investors are now wondering how the Fed will react to today's data. The Central Bank has pledged to keep interest rates near zero until inflation rises to 2%. At the first glance it looks that this goal may be exceeded. However, Boston Fed President Eric Rosengren said today that inflation is unlikely to hit the Fed's 2% target on a sustained basis at least through 2022 and Fed officials are not concerned about an immediate jump in prices expected as the pandemic eases. If this is the case, then the stock market rally could continue. However besides inflation concerns, investors may also worry the upbeat data will reduce the pressure on lawmakers to pass additional stimulus.