There are times when I sit back and view the markets like an amnesiac patient. Economic data comes out on a near daily basis, and depending on interpretation, the market reacts like the whole situation is news to them. “What? There’s a good chance the Fed will raise rates again? Gasp! Well I simply had no idea!” Having said that, the strength of these reactions are definitely diminishing, which should lead to lower volatility over the coming year. As for the specter of recession, that looks to be rapidly diminishing as well. On to the news of the day.

Canadian retail sales fell by 0.1% in November, which was slightly better than the advance estimate and consensus expectation for a 0.5% decline. However, some of the detail wasn't as encouraging, with core retail sales (ex-auto and gasoline) falling by 1.1% and total sales in volume terms declining by 0.4%. While the drop in core retail sales was led by food & beverage stores (-1.6%), there were also large declines in more discretionary areas such as building materials & garden equipment and general merchandise. On a more positive note, the advance estimate for December showed a gain in overall sales of 0.5%, which should look better in volume terms given the sharp decline in gasoline prices that was seen during the month. Overall then, the two months together suggest a bumpy ride still for Canadian retailers, but it is at least a ride that is going broadly sideways still rather than downwards. Today's data shouldn't see much market reaction and shouldn't do much to impact next week's Bank of Canada decision either.

South of the border, the Fed’s Williams says that terminal rate is dependent on incoming data, and the Fed’s Brainard basically confirmed that we’ll see a downshift to 25bps hikes on Feb 1st. In political news, Senate GOP leader McConnell dismissed concerns about reaching a deal on the debt ceiling. Meanwhile, reports circulate that a US treasury team will visit China in February in advance of a potential trip by Yellen.

On the Euro-zone front, European Central Bank President Lagarde provided support for a hawkish ECB narrative yesterday. The ECB statement language validates the market currently pricing in 91bps over the February and March ECB meetings. The bigger question is whether the bank can or should persist with 50bps clips into the start of quarter two. European equity markets gained, as expected, supported by rising retail and industrial-goods stocks, but have become range-bound. Economic data showed UK consumer confidence fell back to a near 50-year low at the start of 2023 and December retail sales unexpectedly fell from November, finishing the worst year ever. German producer prices rose in December at a slower rate than in November, due to lower energy prices.

In the United Kingdom, December retail sales missed expectations (ex-auto fuel sales down -1.1% relative to expectations of +0.4% month-over-month). Despite this, the street is still leaning towards another 50bps hike from the Bank of England in a few weeks. Yesterday, Bailey admitted that the BoE might have to be more forceful than they imagined in the most British way possible – “"I am not endorsing 4.5%, but what you may have noticed in December is that we did not include the comment that we made in November about the market being in our view rather out of line".

Asian markets finished mostly higher ahead of the week-long Lunar New Year holidays, as investors weigh the spread of Covid after curbs were lifted. Japan’s core inflation rose to 4% in December of last year on an annualized basis, the highest since December 1981 and in line with expectations. China’s policy pivots. Just think of the policy shifts that we’ve seen from the Xi administration over the past few months: Covid zero is gone; ‘Three red lines’ are being relaxed for property developers; and more signs of rapprochement with the US. These are all constructive for the global macro.

Oil rose, supported by an improving economic outlook for China, that would result in a boost for fuel demand.

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