We continue to see receding inflation, a still-healthy labor market, but slowing economic momentum that should allow the Federal Reserve (Fed) to slow the pace of their interest-rate hikes.

China’s sudden reopening, a mild European winter, and weaker dollar are positive catalysts for the global backdrop. However, Fed interest-rate hikes act with a long and variable lag and they are doing this while the economy is losing momentum. This has us remaining cautious on stocks and other risk assets.

Retail Sales and Industrial Production Fall

Retail sales dropped 1.1% in December, the most in a year, and slightly worse than the consensus of -1.0%. The previous month was revised down to -1.0% from -0.6% initially, resulting in the biggest two-month drop in retail sales since the lockdowns in April 2020. Some of the decline reflects falling goods prices, but it also shows some retrenchment in consumer demand.

The weakness was broad-based across retail categories, with several falling more than 1.0% from the previous month, including furniture, electronics, miscellaneous, and online sales. On a y/y trend basis, retail sales eased to 6.7%, the slowest pace since February 2021, although that is still stronger than pre-pandemic. While consumers may be spending more on services where there is still pent-up demand from the pandemic, the pullback in goods spending indicates that consumer demand is softening. It suggests the risk of recession in 2023 elevated.

Industrial production fell 0.7% in December, following a downwardly revised 0.6% drop in the prior month, and worse than the consensus of -0.1%. It fell at a 1.7% annualized rate in the fourth quarter, down for the first time since Q2 2020. Industrial production was still up 1.6% from a year ago, but that was the slowest y/y growth rate since March 2021.

The deterioration at year-end of both retail sales and industrial production adds to concerns that broad economic activity continues to lose momentum, keeping the risk of recession elevated.

Producer Prices Bolster Lower Inflation Case

The Producer Price Index (PPI) for final demand fell 0.5% in December, its first decrease in four months, and the most since April 2020. The consensus was for a smaller 0.1% fall. The biggest contributor to the decline was energy prices, which fell 7.9%, the second most in this cycle. Food prices fell 1.2%, the most in two years. PPI ex-energy and food ticked up 0.1%, the smallest gain since November 2020.

On a y/y basis, the PPI for final demand eased to 6.2%, the slowest pace since March 2021, while its core fell to 5.5%, the least since May 2021. Price pressures continued to ease across most stages of production, suggesting that PPI inflation for final demand should also continue to moderate. Along with slower consumer price inflation (CPI), this report strengthens the case for a downshift in Fed interest-rate hikes to 0.25% at the February Fed meeting.

Jobless Claims Show Labor Market Resiliency Continues

Initial claims for unemployment insurance dropped 15,000 last week to 190,000, its third consecutive decline. Claims matched their lowest level since April 2022 and are not that far from their cycle low of 166,000 reached last March. Continuing claims in the prior week edged up 17,000 to 1.647 million, while the insured jobless rate was unchanged at 1.1%. Similar to initial claims, both indicators are off their cycle troughs but remain close to their prerecession levels and are subdued by historical standards.

Despite an increasing number of company reports of layoffs and/or hiring freezes, the low level of initial and continuing jobless claims indicates that workers who lose their jobs find new employment quickly, as labor demand, in aggregate, remains strong. The resilience of the labor market pushes against a recession call at this time, even though data such as retail sales, industrial production, and recent business surveys, reflect significant weakening in economic activity.

This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed here. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s prior written consent. This presentation has been prepared by Janney Investment Strategy Group (ISG) and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. For additional information or questions, please consult with your Financial Advisor.

About the author

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

To learn about the professional background, business practices, and conduct of FINRA member firms or their financial professionals, visit FINRA’s BrokerCheck website: http://brokercheck.finra.org/

;