The “blowout report” on retail sales for March sparked an immediate sell-off of US government bonds and sent global currency markets into a frenzy Monday. It was the latest indication that the largest economy in the world may be too hot to justify lowering interest rates.
US retail sales in March were higher than expected, with consumers continuing to spend despite the uncertainty surrounding the future of rates.
The US Census Bureau released data on Monday showing that retail sales (which includes spending on food and fuel) rose by 0.7 percent last month. Reuters surveyed economists who expected a 0.3% increase.
The revised figure for February increased from 0.6 to 0.9 percent, showing that consumer spending was resilient earlier in the year. This is further evidence of an acceleration of economic growth.
“That retail number was incredibly strong.” . . Tom Simons is a US economist with Jefferies. He said, “I had to raise my GDP expectations due to retail sales.” He expects the first-quarter growth in gross domestic product to reach 3.1 percent, up from his previous estimate of 2.2 percent, which was near Wall Street consensus.
Following the retail sales report, Monday’s “nowcast” of Atlanta Fed GDP was updated. It is a rolling projection that incorporates all new data releases. The estimate for the first quarter is now 2.8%, up from 2.4%.
Inflation was also expected to remain higher. The market measures of inflation expectations jumped recently after three consecutive months with stronger-than-expected data, and further jumped following the Census Bureau’s release.
Charlie McElligott is the managing director for cross-asset strategies at Nomura. He said: “You cannot stop the US consumers when they are employed and wage growth remains near multi-decade-highs.”
Aditya Bhave, an economist with Bank of America, told clients in a client note that the “blowout retail sales” numbers for March were “unambiguously strong”.
He said that while some of the gains in March may seem idiosyncratic to the average consumer, the overall message was one of resilience.
The yields on US Treasuries increased immediately after the release of data.
The yields on the benchmark 10-year bond, which are influenced by inflation and growth expectations, reached a five-month peak of 4.63 percent on Monday. The yield on the two-year note, which is influenced by interest rate expectations and moves in line with them, rose just a few percentage points, to 4.94 percent, to a new five-month-high.
The 5-year inflation breakeven — a measure of market expectations for inflation in five years — has reached its highest point since March 2023. Break-evens are typically highly sensitive to oil price fluctuations, and Monday’s drop was no exception. However, they remain near a five-month peak.
The strong retail sales numbers boosted the US Dollar Index, which tracks six other currencies against the dominant world currency.
The dollar strengthened by 0.7 percent as traders lowered their expectations of rapid Federal Reserve rate cuts, causing the yen to fall.
The US equity markets plunged sharply after Treasury yields increased. This was mainly felt by tech stocks that are sensitive to interest rates. The S&P 500 was down 1.2 percent.
Torsten Slok is the chief economist of Apollo. He expressed concern about a repeat of 2022 when stocks suffered a massive sell-off.
Slok explained that “2022 was characterized by rising interest rates, high inflation and uncertainty as to when the Fed would be finished and if it will eventually cause a slowdown.”
The Fed is expected to cut rates by between one and two quarter points in 2024. Four months ago, the market was expecting between six and seven.