Consumer sentiment in the US for February stands at 64.7, lower than the expected 67.8, with long-term inflation expectations reaching a 30-year high. Canada’s retail sales rose by 2.5% in December, surpassing the 1.6% forecast, while US existing home sales for January were reported at 4.08 million, slightly below the 4.12 million estimate.
The S&P 500 dropped 1.7% and the Russell 2000 fell by 2.9%. WTI crude oil decreased by $2.26 to $70.22, and the US 10-year yields fell 7 bps to 4.35%.
Market concerns centre on inflation, US tax cuts, and tariffs, alongside reports of a covid-like illness in China. The FX market showed a flight to safety, benefitting the yen and challenging commodity currencies, with EUR/JPY and CAD/JPY at recent lows.
February’s consumer sentiment figure for the US came in well below what many had anticipated. A reading of 64.7 versus an expected 67.8 suggests that confidence in the economy is slipping, which can have a direct effect on spending patterns. A weaker consumer outlook often translates to caution in household budgets, potentially slowing overall economic activity. At the same time, long-term inflation expectations have climbed to levels last seen three decades ago. If households and businesses believe inflation will persist at these levels, it could influence wage negotiations, borrowing behaviour, and ultimately, price-setting by companies.
Meanwhile, Canada’s retail sector provided a contrast, delivering a 2.5% rise in December, well above the forecast of 1.6%. This points towards much stronger spending than expected, which could imply resilience in household demand. However, whether this robustness carries forward into subsequent months remains a question, particularly with interest rates still at levels that restrain borrowing. Meanwhile, existing home sales in the US landed slightly shy of estimates, coming in at 4.08 million instead of the projected 4.12 million. This slight miss suggests the housing market remains under pressure, likely due to affordability constraints tied to mortgage rates.
Equities reacted broadly negatively. The S&P 500 lost 1.7%, while smaller-cap stocks, represented by the Russell 2000, fell by 2.9%. When smaller companies underperform larger names, it often signals decreased risk appetite among investors. The drop in WTI crude oil prices by $2.26 to $70.22 per barrel suggests a rethink regarding demand expectations. Further declines in energy prices could reflect concerns over economic momentum globally. Meanwhile, the 10-year US Treasury yield dipped by 7 basis points to 4.35%, pointing to increased demand for safer assets.
Among reasons for the current mood in markets are continued worries about inflation, discussions surrounding US tax policies and trade tariffs, and reports of a respiratory illness in China resembling previous outbreaks. Each of these elements carries the potential to sway risk sentiment, whether through shifts in monetary policy expectations, adjustments in global trade flows, or broader concerns over disruptions to business activity.
Currency markets reacted in a way often seen during periods of uncertainty. The yen benefitted from a shift in positioning towards safer assets, while currencies linked to commodities struggled. Both EUR/JPY and CAD/JPY retreated to levels last seen weeks ago. If cautious sentiment persists, traders may continue favouring currencies considered safer, at least in the near term.
