Falling Retail Sales and Falling Inflation

The series for Real Retail Sales shows a visible drop in the rate of growth, the kind that can be associated with a peaking business cycle, while Core CPI is resuming its downward trend, something that could suggest longer term structural weakness or just that the business cycle peak is farther away into the future.

Since the QE does not end until September given a $10bn tapering pace, the stock market seems to have enough time to complete another bull leg with 1900 - 1950 or even 2000 as possible target.

Weakness becomes visible

The big plunge in the New Orders Index comes as a a surprise, but weakness was expected.

The NFP report confirmed the slowdown with a visible fall in the number of average weekly hours worked for January. This is a leading indicator, so if it does not bounce back soon enough, the headline NFP number should continue to be on the weaker side.

GDP, Durable Goods and the Correction

Good Q4 GDP report with the consumption of Durable Goods still at respectable levels of growth but slowing down. In fact the annual rate of growth for December is significantly lower than the quarterly average. The behavior during the previous expansion suggests rates of growth will slowdown further.

Meanwhile, the stock market seems to have started an intermediate term correction (7-10%). The tapering is finally weighing in. Longer term support is at 1700 SPX:

Retail Sales, CPI and the Taper

Real retail sales kept growing at a good pace in Q4, while the available data on Durable Goods (October and November) suggests a slight slowdown but still a healthy pace. No wonder y/y growth in GDP is accelerating.

Meanwhile the slowdown in Core CPI has stopped but no clear turn to the upside is visible yet.

With economic activity still strong and CPI seemingly stabilizing, the Fed can still find excuses to continue tapering.

Employment - further slowdown expected

Further slowdown expected for the pace of growth in employment.

New Orders Index- strong but peaking

I have written already about the fact that the New Orders Index (component of the ISM PMI) is at peak levels but this time I wanted to show it another way, plotted as a quarterly 3-month average against the GDP. I am planning to show similar charts for other important economic indicators in the future.The red bar in the chart is based on an estimate for Q4 GDP.

So, it is peaking but this does not mean much for the economic expansion. Even lower levels still represent growth.

On the other hand, peaking also means strong and the stock market and the dollar will anticipate the continuation of tapering. This means a larger correction for the S&P500 soon.