Santa Leaves Big Lump of Coal for US Retailers

Weekly Report - 18/02/2019

Retail Sales Report

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The December retail sales report that came out last week, (delayed thanks to the US government shutdown) delivered some seriously bad news. In fact, the worst retail sales news with respect to a Christmas selling season since the Great Recession of 2007. To put the magnitude of the disappointment into perspective, we need to get our heads around some facts. Over 70% of the entire US GDP is generated by retail sales. Itself a sobering reality to ponder. Second, and perhaps more difficult to grasp economically, is that around 72% of annual retail sales occurs in the last month of the year.

The Week That Was


A quick back of the envelope calculation shows that just about half of all US GDP in generated in that last month of the year. Astonishing, but true. One could say that this is just one industry out of many in a diversified and enormous economy. While this is undoubtedly true, it misses an important characteristic of the effect that Christmas sales have on the psyche of the US investor; it elevates or depresses the stock markets and investment in general far beyond the realm of retail. The outcome of this one report has had an historical tendency to set the tone for the coming year because investors’ moods are so strongly influenced by the report. This suggests to us here that weakness in the US economy is likely to follow on to the weakness that we see in China and Europe.

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The Week Ahead


On Wednesday the Federal Open Market Committee of the US Federal Reserve, the Central Bank of the United States, releases its deliberations from its last meeting. We expect them to be bearish concerning the remaining expected interest rate hikes in 2019. Specifically, the current expectation is that the Fed will raise interest rates two more times in the year. Likely to have been 25 basis points (a quarter of a percent) at each tranche, the effect of the retail sales report on the economy is likely to indicate to the FOMC that there is little room to increase the cost of cash (the interest rate). Inflation is below the Fed’s target, and while wage growth is occurring, it is not having a discernable effect on the levels of prices in the economy. Should a hint be divined from the release that interest rate hikes are on hold, expect the stock markets to take a boost up and the greenback to give back some of its recent strength against t its trading partner currencies.

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