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February
15
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Week In Review

Retail Sales

December retail sales, reported late due to the government shutdown, fell 1.2%.  The retail sales control group, used in the calculation of GDP, fell 1.7%.  Economists’ expectations had been for an increase in sales of 0.1%.

Our Take

While the retail sales report is notorious for being revised and October sales were strong, December retail sales were a disaster.  There are numerous factors that potentially contributed to weak sales, including the government shutdown, trade disputes, and a changing Christmas sales cycle.  While the report seems like an aberration, major revisions to expected GDP growth are likely if there is no recovery/revision in January.


China

There were senior level trade talks held in Beijing this week.  The Chinese government statement following the talks stated that they “achieved important progress” and that the two sides had “reached consensus in principle on major issues,” but the White House statement indicated that there is still a lot of work remaining to achieve a deal.  The two sides agreed to continue talking in Washington next week in order to develop a “memorandum of understanding” that could form the basis of a final deal to be agreed by Xi and Trump.  Trump stated during the week that the U.S. could postpone the March 1 implementation of increased tariffs, as more time is needed to finalize a deal, but thus far the U.S. has not made a decision to do so.  Separately, Chinese credit grew at a record pace in January, as the PBOC and government implement their stimulus plans.

Our Take

The Trump administration is seeking to keep pressure on the Chinese government in order to achieve fundamental changes in the Chinese economy.  It remains to be seen what level of changes and verification mechanisms Trump will accept in order to claim victory in the trade dispute.  Regardless of the near-term outcome of talks and their impact on tariff levels, the Chinese economy is fundamentally slowing and the government there is aggressively seeking to maintain growth levels.  These efforts increase risk in the Chinese economy and financial system.


Inflation

Consumer prices were unchanged in January, while producer prices fell 0.1%.  Year-over-year, the CPI is up 1.6%, while the PPI has risen 2.0%.  Inflation readings excluding volatile food and energy prices were a little higher.  Core consumer prices were up 0.2% in January and 2.2% over the last twelve months.  Core producer prices were up 0.35% and 2.6% over the same periods.

Our Take

Realized inflation continues to underwhelm.  The Fed is likely to err on the side of restraint from tightening monetary policy as long as there remains no evidence of an impending pickup in inflation.


Municipals

California Governor Gavin Newsom announced during his State of the State address that the high-speed rail project intended to connect Northern California to Southern California would be scaled back.  Newsom stated that the project had become too expensive.  In 2008 the original project’s total cost was estimated to be $33 billion.  Today’s costs are estimated to be $77 billion.  Newsom said that part of the rail project will continue and will focus on a line connecting Merced and Bakersfield in the Central Valley, along with other preliminary projects.

Our Take

Had Newsom completely abandoned the project, the state would have had to return $3.5 billion in federal funds.  California has already spent $2.5 billion of federal funds on the Merced to Bakersfield project.  California’s newly elected governor is proceeding with fiscal caution.  It may be better to reevaluate the current costs and plan for the best course of action going forward, rather than continue with a project destined to have significant cost overruns.

All expressions of opinions are subject to change without notice in reaction to shifting market conditions.  All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.  Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice.