Retail sales report strengthens the Feds resolve to slower the pace of cuts

The United States Census Bureau released the advanced monthly sales report for December today, revealing that US retail sales rose 0.6% month over month in December 2023. The actual numbers came in line with economists’ forecasts that were predicting a 0.4% growth last month.

“Advance estimates of U.S. retail and food services sales for December 2023, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $709.9 billion, up 0.6 percent (±0.5 percent) from the previous month, and up 5.6 percent (±0.7 percent) above December 2022. Total sales for the 12 months of 2023 were up 3.2 percent (±0.4 percent) from 2022. Total sales for the October 2023 through December 2023 period were up 3.9 percent (±0.4 percent) from the same period a year ago.”

A U.S. Census Bureau report revealed that holiday shopping was much more robust than anticipated in December. The increase in retail sales was reportedly supported by an increase in clothing and accessory purchases, combined with online purchases. Many economic analysts were under the expectation that growth in the U.S. economy is expected to slow in 2024. However, today’s report suggests American consumer spending could remain resilient, which could be incorporated into the Federal Reserve’s decisions regarding the timing and depth of upcoming rate cuts.

More so, when combined with last Thursday’s CPI (Consumer Price Index), which revealed that inflation did not cool in December, increasing by 0.3% on a seasonally adjusted basis after increasing by only 0.1% in November. Revealing that inflation increased by 3.4% year-over-year. Both reports will guide the Federal Reserve when it convenes at the end of the month.

The Federal Reserve has not cut rates since it began its quantitative tightening in March 2022 when it implemented the first-rate hike of ¼%. This trend would be carried through for the entire year of 2022 and the majority of 2023 resulting in 11 consecutive rate hikes which took the Fed’s benchmark interest rate from between 0 ¼% to between 5 ¼% and 5 ½%.

The overly optimistic belief of traders that the Federal Reserve would initiate its first interest rate cut of the year in March has declined from a probability of 64.1% yesterday to 57% today. However, these numbers continue to be well above the narrative expressed by Chairman Powell at his press conference last month, as well as recent statements by multiple Federal Reserve officials confirm that they are overwhelmingly cautious about the timing of initiating the first rate cut.

Bullish market sentiment for gold futures continues to decline since reaching a closing price of $2093 on Wednesday, December 27, the highest value for the February futures contract of gold. Gold has declined by over $42 in the last two trading days. Yesterday gold futures opened at $2053.40 and declined by $21.40. As of 4:45 PM ET, the most active February futures contract is currently fixed at $2009 after factoring in today’s sharp selloff of $21.30, a 1.05% decline.

That being said, we can expect the Federal Reserve to continue its narrative of rate cuts beginning around the end of the second quarter of this year, with an expected three rate cuts totaling 75 basis points.

What could be highly supportive of gold prices is the possibility of increased tensions in the Middle East. Today, Iran warned that attacks will continue as long as the conflict in Israel remains. Iran and its proxy groups have attacked Israel and U.S. targets on more than 100 occasions since mid-October. This could easily widen the Middle East conflict into a regional conflict. Defense expert Nicholas Drummond also echoed these concerns stating that the conflict in the Middle East, "I think it's highly possible that if Iran continues to act through proxies, or to act directly, that threatens Western interests, we could see military action taken against Iran, and that would be a major conflict in the Middle East."

Wishing you as always good trading,