Weak US economic data raises the possibility of a recession

The latest economic data indicates that December was a tough month for consumers. This is evidenced by retail sales data, which decreased by 1.1% from the previous month. Early in the fourth quarter reporting season, major US banks increased their cash reserves in anticipation of more credit losses due to the tough economy. On the one hand, lower inflation is boosting stocks as potentially softer economic conditions create a more favorable trading environment for companies. On the other hand, amid weak retail sales, a sharp drop in industrial production, and news of new layoffs, fears that the US may already be in a recession are growing. This is the third consecutive month of declining industrial activity, with the decline in production looking widespread. The chief economist at RSM US believes that the current trajectory of the economy suggests a “soft recession” in 2023.

Fed spokesman Bullard thinks a 0.5% point rate hike at the next meeting is appropriate, even though inflationary pressures in the US are declining. Another Fed official, Barkin, is of the same opinion. But others are in favor of a 0.25% rate hike at the February 1 meeting. A 0.25% hike in February is considered the most likely (92%) scenario today.

Shares of Microsoft Corporation (MSFT) fell by 1.9% after the company reported cutting 10,000 jobs and receiving a $1.2 billion fine. Moderna, Inc. (MRNA) shares rose by 3.3% after the maker of the COVID-19 vaccine said it was successful in a trial of its experimental vaccine against RSV (contagious respiratory virus) in older adults.

The UK inflation rate fell from 10.7% to 10.5% year-on-year. Core inflation (excluding food and energy prices) remained at 6.3%. The underlying factor behind the decline in inflation is the December decline in energy prices. Money markets are highly confident in favor of a 50 basis point gain at the Bank of England’s February meeting.

Oil prices retreated from Wednesday’s highs amid a Chinese economic opening as US industrial, and retail trade data failed to meet economists’ expectations.

Asian markets were mostly up yesterday. Japan’s Nikkei 225 (JP225) gained 2.5% on Wednesday, China’s FTSE China A50 (CHA50) decreased by 0.36%, Hong Kong’s Hang Seng (HK50) ended the day up by 0.47%, India’s NIFTY 50 (IND50) increased by 0.62%, and Australia’s S&P/ASX 200 (AU200) ended the day up by 0.10%.

Columbia University academic Takatoshi Ito, who is considered a candidate for governor of the Bank of Japan, said Thursday that higher-than-expected inflation could eventually push Japan’s central bank to extend the range of benchmark bond yields this year. It’s a step toward normalizing monetary policy. Japan’s consumer inflation data will be released this Friday and is expected to be 4%.

Australian labor market data indicates that the labor market is starting to cool off. Over the past month, the employment rate fell by 14.6k jobs, with an expected 58.3k growth. If this trend continues, it will give the Reserve Bank less economic room to raise interest rates.