Overview: The December retail sales report was very disappointing with a decline in total retail sales of 2.7% m/m. Furthermore, both the October and the November data were revised down substantially. After today's data, the hope that personal consumption was about to stabilise on the back of the strong boost from falling gasoline prices has been dashed, for now.

The negative surprise took its toll on the markets. US Treasury yields dropped across the curve, with the 10-year segment trading 10bps lower and the 2-year segment trading 6bps lower. The recent negative flow of data and a renewed rise in risk aversion is currently keeping downward pressure on US bond yields. Equi-ties went into red territory with S&P 500 futures losing around 2% in the wake of the release.

Details: Although some of the decline in the December retail sales was attributable to lower gasoline prices, the contribution of -1.3pp was far from sufficient to account for the entire weakness. Our preferred measure of the underlying trend in retail sales - which excludes building materials, cars and gasoline - fell by 1.4% m/m - the worst monthly performance so far in this cycle. The 3-month average growth rate in this core measure is now -8.5% annualised, which leaves us with absolutely no sign of stabilisation in consumer demand.

The implications for real consumption spending in December is much weaker than we had anticipated prior to the release. The data points suggest a decline in real consumption spending of 0.3 - 0.4% m/m in De-cember. Further, there are major downward revisions to the prior two months. October real personal spending is likely to be revised down from -0.45% m/m to -0.6% m/m. November real personal spending is likely to be revised down from +0.55% m/m to +0.26% m/m.

Assessment & Outlook: Q4 consumer spending growth is now tracking -3.5% q/q AR, which is substan-tially below our estimate of -1.2% prior to the report. Consequently, our Q4 GDP estimates have been low-ered to -6.5% q/q AR from previously around -5.25% q/q AR. We continue to believe that consumption will stabilise early next year and into Q2 as the boost from gasoline prices, the benefits from mortgage refinanc-ing and the upcoming stimulus package kicks in. GDP is set to contract further - but at a somewhat milder pace - in Q1, followed by a stabilisation in Q2.