Mid-Market Update: US stocks drop after impressive retail sales data supports the Fed’s hawkish case for more hikes, January shopping spree, Empire improves, Massive stockpile build sinks oil, Gold weakens, Crypto wavers

US stocks softened after an upside surprise with retail sales supports the idea that the Fed can remain very aggressive with fighting inflation. ​ The US economy is looking like it will have a solid first quarter and recession doubts are getting some vindication here. The data-dependent Fed is seeing its case for more ongoing rate increases get bolstered after both inflation accelerated and as retail sales rebound sharply in January. ​ Treasury yields continue to rise as the risks grow that the Fed will have to take rates even higher into restrictive territory.

US Data

The American consumer went on a shopping spree in January. The consumer still has money saved and will continue to spend it as long as the labor market remains robust. ​ US retail sales rose 3.0% in January, an impressive rebound from the -1.1% December reading and a strong beat from the 2.0% consensus estimate. ​ Retail hiring didn’t weaken in January, avoiding the traditional post-holiday slump, which supports the idea that the economy isn’t weakening yet.

Everyone knew car sales were impressive in January, so many traders focused on the strong retail sales ex-auto beat of 2.3%, better than the 0.9% estimate. Auto sales rose 5.9% from December and 2.8% from a year ago. Warm weather may have played a factor with an impressive retail sales report as spending at restaurants and bars increased 7.2%.

The Empire manufacturing report showed business activity is improving, but still has a long way to go. ​ The February headline general business conditions index rebounded from -32.9 to -5.8, well above the expected -18.0 consensus estimate. ​ Business activity is still negative but firms expect business conditions to improve over the next six months. Employment levels decreased for the first time since early in the pandemic, but that was somewhat to be expected.

January manufacturing output posted its best increase in a year, but that might not last as the global outlook is softening. ​ This manufacturing report somewhat goes against the softness we saw with the ISM report, so traders might not give this one too much attention.

Oil

Crude prices are under pressure as the dollar rallies following impressive economic data that paves the way for more Fed tightening. ​ Oil extended declines after US stockpiles surged to the highest levels since June 2021. ​ The headline build of 16.3 million barrels per day was well above the 1.38M consensus estimate. ​ Production was steady and implied demand across crude oil, gasoline and distillates were softer across the board.

Yesterday’s API data posted a US stockpile increase of 10.51 million barrels, so some traders were somewhat expecting a big build. ​ ​

WTI crude might not break here as there is still too much strength in the economy and as the manufacturing parts of the economy may be close to bottoming out. Energy traders may continue to buy on dips and the mid-$70s may still provide major support. ​

Gold

Gold prices are dropping after retail sales and manufacturing data suggest the economy is strong enough to handle even more tightening by the Fed. Gold is also weakening as one of its potential catalysts for the second half of the year is fading away. Many investors were anticipating that a hard landing scenario could prove troubling for risky assets and drive some flows towards bullion. ​ Now it is looking less likely that a hard landing scenario will play out.

Bitcoin

Bitcoin is starting the day initially higher despite broad risk aversion on US data that suggests the US economy could handle much more Fed tightening. ​ Crypto traders are also learning more about proposed rule changes for which crypto firms can custody customer assets. ​ It seems crypto regulation is about to get clearer and guidelines for qualified custodians will require being a registered-broker dealer, futures commission merchant, or trust/foreign financial institution. ​

Bitcoin resilience is somewhat impressive here given the bond market volatility and steady flow of regulation headlines.