U.S. Retail Sales Preview: Stocks at Risk if Data Cools Fed Rate Cut Bets
By:Ilya Spivak
Financial markets settled on a curious response to February’s hotter-than-expected U.S. inflation data.
Headline price growth registered at 3.2% year-on-year, marking an unexpected rise from January’s 3.1%. The core rate excluding volatile food and energy prices ticked lower to 3.8% from 3.9% previously, but overshot bets on a steeper slide to 3.7%.
Bond yields dutifully rose as the priced-in outlook for Federal Reserve monetary policy shifted to a less-dovish setting, pushing Treasury bonds lower. That, in turn, weighed on gold prices and Japanese yen. Fed funds futures now see 71 basis points (bps) in cuts this year, the lowest in two weeks.
Price action gets murkier from there. The U.S. dollar broadly idled, oscillating in a choppy intraday range before settling with meager 0.08% rise against an average of its top counterparts. Stock markets offered the most head-scratching interpretation however: the bellwether S&P 500 rose 1.06% while the Nasdaq added 1.43%.
Wall Street cheered building rate-cut speculation in the closing months of 2023.
Stocks roared higher as the U.S. central bank signaled that its hiking cycle was likely at its peak and easing would arrive before long. Between late October and the start of the new year, 60bps turned into 150bps in expected rate cuts.
As 2024 got underway, that dovish bias stacked up favorably against the Fed’s own December forecast of 80 bps. If traders had it right, mounting evidence would push the central bank would have to acquiesce to cheaper money. Not surprisingly, stocks stayed aloft.
They have been resilient even as chipper economic data flow deflated market rate cut bets. Presumably, this reflected the view that any amount of easing that was greater than or equal to the Fed’s 80 bps baseline was supportive of risk-taking if the economy didn’t show signs of stress.
Now, with 71bps in the forecast, the key question is whether shares can continue to march higher even if credit costs move to a more restrictive setting than Fed Chair Jerome Powell and company envisioned. At 61 bps, the outlook will have shifted to the likelihood of two cuts versus three. Next, the spotlight turns to February’s retail sales report.
Analysts expect a monthly rise of 0.8% in receipts. That would mark a welcome pickup from January, when they suffered the largest drawdown in 10 months. Perhaps most worryingly, the year-on-year growth rate fell to just 0.6%, the lowest since slump in the second quarter of 2020 amid the onset of the COVID-19 pandemic.
Leading purchasing managers index (PMI) data signaled that the consumer goods space outperformed among the seven major sectors of U.S. economic activity last month, while consumer services expanded at the fastest pace since August 2023. This might set the stage for brisk results that push down Fed rate cut expectations further.
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
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.