December’s retail sales gave a stark reminder that the economy is not rosy anymore. They contracted 1.2% monthly in December versus +0.1% expected, and November’s figures were downwardly revised. This is the largest contraction since September 2009. Similarly, the gauge that excludes automobiles and gasoline slumped 1.4% monthly compared to forecasts of +0.4% and +0.5% in November. Why? First, the US federal government shutdown that started on 22 December sparked cautiousness among consumers and deprived civil servants of an income. Second, the December market sell-off was violent enough to remind both investors and consumers that a recession is still a possibility. There is a good chance that consumers increased saving at the expense of spending.

In the FX market, poor US data triggered some volatile moves but failed to set a clear trend. Safe-haven assets such as the Japanese yen benefited from the surprise. USD/JPY fell more than 0.75% to reach 110.35. Gold is also better bid as the price of an ounce rose to $1,315 this morning from $1,302 yesterday.

Crude oil surging

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The rise in inventories continues, and attention is turning to OPEC+ members which have tightened supply, pushing Brent, WTI and Shanghai future up by 4.15%, 3.13% and 2.95%, their highest in 3 months. US sanctions against Venezuela’s oil giant PDVSA is causing supply shortages while US refineries scramble to find alternative supplies. A December pledge from OPEC + to cut output by 1.2 million barrels per day is taking effect. Saudi Arabia made the largest cut, estimated at 450’000 bpd. A technical problem at its offshore Safaniyah field, where production can reach up to 1.5 million bpd, should be fixed in March. Russia’s vow to decrease production by 228’000 bpd by May should also support prices. Still, the macroeconomic outlook remains bearish in the medium-term. Weakening economic growth in the US, EU and Asia and a continued rise in US crude output should maintain Brent prices in a range of USD 60–70 in the coming months. Currently trading at 64.75, Brent is heading along USD 65 short-term.

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