Stocks fell this morning as investors awaited the minutes release from the Federal Reserve’s January meeting. Traders also digested key retail data, which was revealed shortly before the market opened.
Last month, US retail sales exploded 3.8% higher month-over-month (MoM), beating the +2.0% MoM estimate with ease. It was a huge surprise after December’s disappointing retail sales slump (-1.9% MoM) suggested that a spending slowdown could soon be on its way.
Non-store retailers, like Amazon.com, primarily drove January’s retail surge alongside auto sales, causing the major headline “beat.” But just like with other economic data from January, the retail sales headline number was the result of a major seasonal adjustment.
We talked about seasonal adjustments in our commentary on the most recent jobs report.
Historically speaking, many holiday-related jobs are no longer needed as the economy transitions from December to January. The Bureau of Labor Statistics (BLS) uses seasonal adjustments to account for the resulting reduction in employment in an attempt to give a more accurate picture of the labor situation.
Last January, though, the BLS issued an unprecedented seasonal adjustment. In reality, 2.8 million jobs were lost last month – something the BLS openly admitted in its report. But the headline number (after being adjusted) showed a 467,000 payroll gain.
Had the BLS used more of an apples-to-apples seasonal adjustment (like January 2021’s adjustment), the number of employed workers in January 2022 would have instead dropped by 272,000.
With today’s retail sales data release, the same kind of unprecedented adjustment was made. Post-adjustment, retail sales soared +3.8% MoM. Unadjusted, retail sales actually cratered, falling a whopping 18.5% MoM – a new all-time record.
This meant that the seasonal adjustment was record-breaking as well.
Regardless, analysts lapped up the headline figure, celebrating it as proof of a strong consumer.
“Consumers say they are worried about inflation, but they continue to spend,” said Gus Faucher, PNC’s chief economist.
“Even taking into account the December decline, retail sales in recent months have been increasing much faster than prices, so households are purchasing larger volumes of goods and services, not just paying higher prices.”
Nobody on Wall Street seemed interested in taking a deeper look at the data. Or, if they did, they were too scared to discuss it with the mainstream financial media.
It’s also possible that most folks simply ignored the report in favor of a far more important release, coming this afternoon. The January FOMC meeting minutes are to be revealed today at 2 pm EST, and if the minutes make it sound like the Fed believes that it’s behind schedule with tightening, bulls could react very poorly.
The major indexes could easily double their morning losses heading into the close, if not worse.
On the other hand, if the minutes show that the Fed is more dovish than expected, an afternoon rally could just as easily follow.
“Today’s FOMC minutes of the Jan. 26 meeting will be scrutinized for any rhetoric indicating a lean for hiking or not hiking in larger increments than 25 basis points,” wrote Saxo Bank strategists in a note to clients.
“The market has priced in just over 40 basis points of hiking through that March FOMC minutes.”
Until we learn more, stocks should remain somewhat coiled. But that’s likely to change immediately following this afternoon’s “big reveal,” which may be the one event that determines the market’s direction over the next few weeks as the first rate hike looms in March.
