U.S. Economic Data Indicates Inflation is Coming

U.S. investors had the opportunity to react to three key economic reports on Friday, Retail Sales, Producer Prices and Consumer Sentiment. The price action, however, suggests investors may keep these numbers on the backburner, choosing instead to focus on the upcoming inauguration of Donald Trump as President of the United States and the subsequent revealing of his plans to rebuild America.

The Commerce Department reported that December Retail Sales rose 0.6 percent, slightly higher than the 0.5% estimate and well above the previously revised 0.2%. Core Retail Sales rose only 0.2%, coming in below the 0.5% forecast and below the revised 0.3% from November.

The rise in U.S. retail sales was supported by strong demand for automobiles and furniture. Traders said the increase in demand may have been fueled by consumer confidence shortly after the election.

Producer prices, or wholesale prices also rose, indicating that inflation is beginning to pick up. This was the second straight month of gains. It was also the biggest year-on-year gain in just over two years. It also suggests that consumers are starting to anticipate increases in prices due to the uptick in inflation.

According to the Labor Department, the Producer Price Index for December increased 0.3 percent last month, coming in slightly below its 0.4 percent advance in November. Year-on-year, the PPI is up 1.6 percent, the largest gain since September 2014.

The rise in the PPI number was reflected in the University of Michigan’s survey of consumers. It showed five-year inflation expectations rising to 2.5 percent in early January from a record low 2.3 percent in December.

In other economic news, University of Michigan Consumer Sentiment came in below expectations at 98.1. Business inventories rose 0.7%, well above the 0.3% estimate and last month’s revised -0.1%.

U.S. Equity Markets

Stock traders had a mostly mixed reaction to the economic data. Their focus on Friday was on the strong quarterly earnings from U.S. banks. Despite the small gains in the S&P 500 Index and NASDAQ Composite, the short-term momentum continues to show signs of weakening. This was reflected in the weaker Dow Jones Industrial Average.

U.S. Treasurys

The strong economic data helped push U.S. Treasurys lower, with the benchmark 10-year note yield rising to 2.393 percent. The two-year note yield advanced slightly to 1.1197 percent.

The rising Treasury yields helped underpin the U.S. Dollar against a basket of currencies while pressuring gold prices from their seven-week high.