Retail sales leap, testing Fed rate-cut bets, as consumers end 2023 with confidence

Updated at 9:42 AM EST

U.S. retail sales powered firmly higher in December as consumers shrugged off faster inflation and accelerated their holiday spending into the end of the year.

The reading from the Commerce Department Wednesday is likely to test market bets that the Federal Reserve will lower its benchmark interest rate in the spring, and then again later in the year. That’s because stronger consumer spending raises the risk of stoking near-term inflation.  

People shop in mall with “sale” signs.

Image source: Hanna Lassen/Getty Images

Headline retail sales rose 0.6% from November levels to a collective total of $709.9 billion, the Commerce Department said, more than double economists’ forecasts of a 0.2% advance. The November total was unrevised at 0.3%.

The closely tracked control group number rose 0.8% following an upwardly-revised 0.5% gain in November. This figure, which excludes autos, building materials, office suppliers, gas station sales and tobacco, feeds into the government’s GDP calculations.

Sales by category (prior month):
Department stores +3% (-2.1%)
Clothing +1.5% (+1%)
E-commerce +1.5% (+1.2%)
Motor vehicles, parts +1.1% (+0.8%)
Restaurants, bars 0% (+1.7%)
Electronics -0.3% (-1.8%)
Furniture -1% (+2.4%)
Gas stations -1.3% (-3.4%)
Health, personal care -1.4%…

— Liz Ann Sonders (@LizAnnSonders) January 17, 2024

Gasoline station sales were down 1.3%, the release indicated, after Energy Department data showed the national average fell nearly 20 cents from November levels to $3.257 per gallon.

Data published last week showed that headline inflation ticked higher in December, rising to 3.4%. But the report also indicated that core inflation, which strips out volatile components like food and energy, eased to 3.9%, the lowest in two years.

The Fed has said it tracks core inflation pressures as part of its price-stability mandate, and the year-on-year gains remain nearly double its preferred target of 2%.

“This report is much stronger than we expected, and the lack of any significant revisions to the prior data is unusual,” said Ian Shepherdson of Pantheon Macroeconomics. 

“Our mapping of the retail sales numbers to the PCE data suggests that real consumption spending rose by around 0.4% in December, rounding off a 2.7% annualized increase across the fourth quarter as a whole,” he added. “That’s a modest step down from the 3.1% annualized increase in Q3, but is still strong by any reasonable yardstick, and comfortably above the medium-term trend.” 

“Moreover, the positive carryover effect from the strong December print means that if real consumption spending is unchanged over the next three months, it will still rise at a 1.6% annualized rate in the first quarter,” he noted.

U.S. stocks extended declines following the data release, with the S&P 500 falling 35 points, or 0.73%, in the opening hour of trading while those linked to the Dow Jones Industrial Average fell 120 points.

Related: Inflation ticks higher in December, testing Wall Street’s Fed rate-cut bets

Benchmark 10-year Treasury note yields edged 4 basis points (0.04 percentage point) higher to 4.109% while 2-year notes were pegged at 4.345%.

CME Group’s FedWatch now suggests the Fed will hold its benchmark rate steady later this month in Washington, at between 5.25% and 5.5%, with the odds of a March rate cut now pegged at around 59.5%.

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