‘Blowout’ US retail sales shake bond and currency markets

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A “blowout” March retail sales report sparked a sell-off in US government debt and shook global currency markets on Monday, in the latest sign that the world’s largest economy may be running too hot to justify cutting interest rates.

US retail sales were much stronger than expected in March, as consumers kept spending despite uncertainty about the future path of interest rates.

Data from the US Census Bureau published on Monday showed that retail sales, which include spending on food and petrol, rose 0.7 per cent last month. Economists surveyed by Reuters had expected an increase of 0.3 per cent.

The figure for February was revised up from a rise of 0.6 per cent to one of 0.9 per cent, indicating resilient consumer spending earlier this year and providing further evidence of a reacceleration of economic growth.

“That retail sales number was profoundly strong . . . I had to mark up my GDP expectations because of retail sales,” said Tom Simons, US economist at Jefferies. He now expects first-quarter gross domestic product growth to hit 3.1 per cent, up from a previous estimate of about 2.2 per cent, which was close to the Wall Street consensus.

The Atlanta Fed’s GDP “nowcast”, a rolling forecast that incorporates new data releases, was updated on Monday following the retail sales report. The first-quarter estimate is now 2.8 per cent, up from 2.4 per cent.

The expectations of higher growth were accompanied by expectations that inflation will also stay higher. Market measures of inflation expectations have climbed recently following three consecutive months of stronger than expected data and jumped further following the Census Bureau release.

“You can’t stop the US consumer when they are fully employed with wage growth remaining near multi-decade highs,” said Charlie McElligott, managing director of cross-asset strategy at Nomura.

Aditya Bhave, an economist at Bank of America, wrote in a note to clients that March’s “blowout” retail sales numbers were “unequivocally strong”.

“Some of the March gains appear idiosyncratic, but the broad message is one of consumer resilience,” he said.

Prices for US Treasuries dropped immediately after the data release, pushing yields higher.

Yields on benchmark 10-year note, which move with growth and inflation expectations, rose to a five-month high of 4.63 per cent on Monday. The two-year yield, which moves with interest rate expectations, rose to within a hair of a five-month high, up 0.05 percentage points to 4.94 per cent.

The five-year inflation break-even — a market measure of inflation expectations in five years’ time — reached its highest level since March 2023. The break-even is typically very sensitive to oil prices, which fell back on Monday but remain close to a five-month high.

In currency markets, the strong retail sales figures boosted the US dollar index, which tracks the world’s dominant currency against six international peers.

The yen fell 0.7 per cent beyond ¥154 per dollar for the first time since 1990, as traders slightly scaled back their bets on rapid rate cuts from the Federal Reserve, strengthening the dollar.

US equities markets fell sharply as Treasury yields rose, with the pain concentrated among interest rate-sensitive tech stocks. The S&P 500 index was 1.2 per cent lower.

Torsten Slok, chief economist at Apollo, pointed to fears of a return to 2022, when equities underwent a brutal sell-off.

“What characterised 2022 was that interest rates were going up, inflation was too high and therefore there was uncertainty about when the Fed will be done and will the Fed eventually create a slowdown,” Slok said.

Markets are now pricing in between one and two quarter-point rate cuts by the Fed in 2024, having expected between six and seven just four months ago.

Additional reporting by Stephanie Stacey in London