Contraction in US Retail Sales Stokes Recession Fears

Contraction in US Retail Sales Stokes Recession Fears

Yesterday afternoon saw disappointing retail sales figures out from the US, with the world’s largest economy seeing a 1.1% contraction on a month-on-month basis for December. Given that this contraction was deeper than had been forecasted (to the tune of 0.3 percentage points), murmurings of recession fears spread throughout global markets which hit equities and energy markets. Indeed, the Dow Jones closed 613pts lower having seen a sizable 1.8% depreciation while the Nasdaq and S&P closed 1.24% and 1.56% lower, respectively. For the Dow and S&P, yesterday marked the worst performing day in over a month, eroding gains made over this week’s previous sessions while it was the Nasdaq’s first close in the red for eight days.

Given that the fall in retail sales will likely take some of the inflationary heat out of the US economy, many investors revised down their expectations of the Fed opting for a 50bpt rate hike on 1st February. As such, the general market consensus considers that the FOMC will raise rates by 25bpts, bringing the base rate to 4.75%.

As such, US treasury yields also dropped with the 10-year falling to 3.37% - it’s lowest level since mid-September, while the 2-year (which is more sensitive to near-term rate hike expectations) fell to its lowest level since early October at 4.07%.    

IEA Forecast Global Oil Demand Could Rise by 2m bpd

According to the International Energy Agency, global oil demand could rise by 2m bpd to reach a record level of just shy of 101.7m bpd. According to the IEA, half of the expected rise in demand will be driven by China’s reopening. Over the course of last year, Chinese oil demand dropped on average by 390,000 bpd, which also represented the first annual decline since 1990.

Away from the demand side, the IEA also highlighted potential oil supply side constraint. The group stated that “world oil supply growth in 2023 is set to slow to 1 mb/d following last year’s OPEC+ led growth of 4.7 mb/d. An overall non-OPEC+ rise of 1.9 mb/d will be tempered by an OPEC+ drop of 870 kb/d due to expected declines in Russia. The US ranks as the world’s leading source of supply growth and, along with Canada, Brazil and Guyana, hits an annual production record for a second straight year.” The IEA also stated that growth in energy efficiencies and the rise in sales of electric vehicles could lead to a demand-side shortfall of 900,000 bpd. Hence, all eyes will continue to be focused on China’s reopening and the ongoing conflict in Ukraine.  

Norway’s Sovereign Wealth Fund Manager Warns of Tough Times

Norway’s sovereign wealth fund manager, Nicolai Tangen has warned that global equity markets are far from being out-of-the-woods yet and investors should be realistic about their expectations. Tangen posited that the Fed could potentially have a further rate hike cycle which would thus see the terminal rate exceed current market expectations of around 4.9% by the middle of this year. As such Tangen stated, “I think we will see a long period of time with very, very low returns”.

Last year was a challenging year for the Norges Bank Investment Management which suffered losses of around 14% - its second-worst performing year after 2008. The Norges Bank Investment Management was established a quarter-of-a-century ago and is one of the largest investment funds in the world, holding over $1.2 trillion in assets. The fund invests in a variety of assets classes, including fixed income, property and infrastructure though since most of its portfolio is made up of equities, the fund is particularly sensitive to the current market-conditions and the Fed’s hiking path.

Today in Focus  

Today is a little light on tier one date, however we will see Christine Lagarde speak at 10:30 this morning, where markets will be wanting to gauge any further indication of what the ECB may do at their next rate hike decision on 2nd February, and Lagarde’s wider economic assessment. Data out this morning also showed Australian unemployment to come marginally above expectations as it hit 3.5%. This morning, the world woke up to the news that NZ’s PM Jacinda Ardern will leave her post by early February, citing that she no longer had “enough in the tank”.