Disappointing Retail Sales, CPI and Swiss Central Bank Action Push Yields Lower

Advance retail sales for December surprised to the downside last week when the release showed a 0.9% month-over-month decline versus consensus expectations of -0.1%. In addition, November retail sales were revised down by 0.3%. Lower gas prices, which are expected to spur consumer spending, have not yet had a measurable impact, with nine out of the thirteen core retail sales categories falling in December. Inflation, as measured by CPI, also remains muted. The consumer price index fell 0.4% month-over-month in December, which matched expectations. Falling oil prices and slowing economic growth overseas has led to lower import prices and dragged down inflation. Import prices fell 2.5% month-over-month in December, but were down just 0.1% excluding energy. Finally, the Swiss National bank announced last Thursday that it would remove a currency peg that had been capping the value of the Franc at 1.2 versus the Euro since 2011. In an effort to offset the expected impact of that change, the SNB cut interest rates as well (a lower rate makes the currency less attractive and slows appreciation after removal of the peg), which was not particularly effective in practice. The peg had been in place to protect the Franc from rampant appreciation and thus shield Swiss businesses’ competitiveness. U.S. interest rates fell on the news as investors sought safe assets in a time of market uncertainty in the markets. The 10-year Treasury hit an inter-week low of 1.70%, but backtracked slightly to 1.78% after the University of Michigan Consumer Sentiment Index rose to 98.2, its highest level in 11 years. Though we continue to see divergence between the U.S. and the rest of the world economically, global factors are no doubt influencing our domestic financial markets.

Source: Bloomberg, NY Times