Will U.S. Consumers Bail Out Stocks Worried About Higher Interest Rates?

Stock markets may look to consumer confidence and retail sales data to gauge how the economy will fare as Fed rate cut bets evaporate

• Stock markets are struggling for direction as Fed rate cut bets evaporate.
• Investors seem unsure about the economy’s ability to digest higher rates.
• U.S. consumer confidence and retail sales data likely in the spotlight next.

Wall Street seems to be struggling to decide how to proceed.

Despite sharp day-to-day gyrations, the bellwether S&P 500 has gone virtually nowhere in over a week. The tech-oriented Nasdaq 100 is trading flat for the month of April having led a blistering equities rally with peppy gains since November.

Investors are clearly troubled by sticky inflation and its implications for Federal Reserve monetary policy. Consumer price index (CPI) data published this week was worryingly hotter than expected, triggering a sharply hawkish rethink of the priced-in outlook.

Stock markets stall as Fed rate cut hopes evaporate

Fed funds futures are now pricing in just 36 basis points (bps) in rate cuts this year. That amounts to one standard-sized 25 bps reduction and a 44% probability of a second one. This is in stark contrast to the three rate cuts envisioned by the central bank itself in its latest Summary of Economic Projections, published on March 20.

Stock markets embarked on a vigorous advance in the fourth quarter of last year as the Fed signaled that the rapid rate hike cycle it launched in March 2021 has ended. Investors’ expectations tilted sharply more dovish than those of the central bank, calling for six cuts at the start of 2024. The promise of cheap credit in the future stoked risk appetite.

That is, until now. With the markets’ baseline now on the hawkish side of the Fed’s thinking, worries about covering trading losses with more expensive capital down the road have seemingly discouraged risk-taking. Nevertheless, a breakdown has failed to materialize, at least for now.

This might be because hotter inflation and its policy implications follow on from an economy that is holding up better than expected. Citigroup analytics tracking U.S. economic data outcomes relative to baseline forecasts show steady outperformance since the beginning of the year. Stocks cheered firm U.S. jobs data last week.

Will U.S. consumers revive investor optimism?

The spotlight now turns to the U.S. consumer. Household consumption is the lifeblood of the economy, so if there is insight to be had for head-scratching investors about the resilience of growth in the face of higher interest rates, this might be the most obvious place to look.

A closely watched gauge of consumer confidence from the University of Michigan is expected to show that sentiment is holding steady near a three-year high for a fourth consecutive month in April. Cooling inflation expectations seem to be the motivating factor. At 2.9%, consumers’ one-year outlook matched a three-year low in March.

Next week, U.S. retail sales data is projected to show that receipts rose 0.3% from the prior month in March, a cool-off from the 0.6% increase in February. The year-on-year growth rate has withered so far in 2024, averaging just 0.8% in the first two months of the year compared with 3.4% in 2023.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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