By Thursday, total doom was priced in, so it should not be a surprise that interest rates backed up when the headline number for December retail sales was not as weak as expected, generating a bout of profit taking in the bond market and value-buying in the equity market. Moreover, first-quarter consumption may be even weaker and corporate earnings growth is likely to be dismal. Looking beyond this volatility to the trend in the economy, we are still on track for very weak growth in the first half, possibly negative growth, followed by a rebound in the second half. This rebound is dependent on Fed easing and we continue to believe the Fed will aggressively cut interest rates. There is a fair amount of data to be released between now and the next FOMC meeting on January 30-31 and some of this data will help the Fed decide between cutting rates by 25 bps or 50 bps.
Economic data continues to weaken and any upward blips in inflation are considered to be temporary.
Revolving credit remains on a steep up trend and non-revolving credit has also picked up recently. Risks of import pass-through inflation remain low however, as imported capital and consumer goods prices were down again. Jobless claims for the week ended January 6th fell 36,000 to 345,000. The four-week moving average, however, increased by 6,000 to 363,000. Claims have been quite volatile in recent weeks, but there is no mistaking the rising trend.