1. Retail Sales
Retail sales in the United States put in a strong 0.6% month of month rise in December 2023. The rise doubled the 0.3% increase seen in November and also beat expectations set at 0.4%. Purchasing power seems supported by rising wages and tamer inflation. Several segments of the economy saw
double digit retail spending growth in December compared to one year ago. Restaurants and bars, electronics and appliances, health and personal care, and auto and parts dealers all saw just over 10% growth. The strong sales numbers support the idea the Fed will likely hold interest rates steady at the next FOMC meeting scheduled for January 30-31 and lean toward cutting rates later in the year.
2. Building Permits
Preliminary estimates show building permits in the United States rose 1.9% in December which would be further improvement on November’s numbers. Multi-segment housing rose by 2.2% while single family authorizations also rose but by a smaller 1.7%. All U.S. regions apart from the West saw increased building activity.
Data on housing starts for December was also encouraging. Although a decline in housing starts from November to December was noted, December data was still much better than analyst’s estimates and compared positively to the same period one year ago. Mortgage rates cooling to roughly 6.7% and the massive lack of housing supply are driving forces for new construction.
3. Michigan Consumer Sentiment
Friday’s Michigan Consumer Sentiment came in strong at 78.8 for January. The sentiment indicator was well above December’s 69.7 and easily beat expectations of 70.0. Importantly, expectations for yearly inflation decreased to 2.9% which is a low not seen since December 2020. The new data is yet more evidence that U.S. consumers will continue to power the economy for the foreseeable future.
4. Middle East Supply Route Disruptions
Red Sea belligerence escalated further over the course of the week with continued missile and drone attacks on international cargo ships and fresh rounds of U.S. airstrikes on Iranian backed Houthi militant positions in Yemen. A trade group dealing with global shipping supply chains stated container ship diversions around the Cape of Good Hope appear likely to last for months. On Tuesday, energy shipping company Shell and three major Japanese tanker and bulk carriers suspended all Red Sea transport routes. Global positioning data shows container ship transits in the Red Sea down sharply with tanker transits down only modestly yet with plenty of room to fall. For now, dry bulk transits remain relatively unchanged.
Drastic increases in insurance costs could be the final straw pushing the remaining tanker volume to choose the Cape of Good Hope route. Frode Morkedal, a shipping analyst at Clarksons Securities, noted premiums on shipping insurance increased over the past few weeks from 0.1% to 0.5% of a ship’s hull value, and some contracts were now reaching 1%. As more premiums hit the lofty 1% threshold, copious shipping volume diversions around Africa seem inevitable. The longer route means more ships on the water for longer transport times and therefore a decrease in supply of shipping space. Shipping company equities have been reacting positively to the now tighter and still tightening market. Tickers to research that are following this trend are ZIM and GSL on the NYSE and SBLK on NASDAQ.
As global supply chains grapple with the evolving Red Sea threat; the U.S. Navy is surely learning how to manage the latest threats posed by inexpensive but numerous small aerial vehicles or drones. Reports indicate dozens of cheap drones have been destroyed by SM-2 missile strikes. However, one SM-2 costs 2.1 million dollars while their drone targets are likely priced for an off the shelf retail market. As the Houthi attacks continue, watch for signs of evolving U.S. Navy tactics which would be more sustainable.
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