(Bloomberg) — The largest bond market in the world experienced a decline after a strong retail sales report led traders to reduce their expectations for Federal Reserve interest rate cuts this year.
The Treasury yields rose as the positive economic data raised doubts about the speed at which the central bank would ease its policy. Swap contracts indicated a total of 42 basis points in rate cuts over the November and December meetings. Despite the S&P 500 reaching new all-time highs, the increase in equities petered out. In late trading, Netflix Inc. saw gains as its subscriber additions exceeded estimates.
US retail sales in September surpassed expectations, showing a broad increase and demonstrating the resilient consumer spending that continues to drive the economy. This data follows a strong jobs report and a consumer inflation print that was higher than expected, reinforcing the belief that the economy is far from a recession.
“There is a slim possibility of a Fed pause in November, but it would likely require all significant economic reports leading up to that point to indicate a stronger US economy than assumed,” said Matthew Weller of Forex.com and City Index. “Regardless of the Fed’s actions in November, the projected path for interest rates in 2025 and beyond is higher than it has been in weeks.”
The S&P 500 and Nasdaq 100 remained relatively unchanged, while the Dow Jones Industrial Average rose by 0.4%. Nvidia Corp. saw gains after a positive outlook from Taiwan Semiconductor Manufacturing Co. Meanwhile, Travelers Cos. surged by 9% following a tripling of profits to $1.3 billion from the previous year. However, Elevance Health Inc. tumbled by 11% as the insurer revised its annual outlook downward.
Ten-year Treasury yields rose by seven basis points to 4.09%. The euro depreciated as traders increased their bets on a significant rate cut by the European Central Bank in December. The yen also fell, reaching the key psychological level of 150 per dollar, raising concerns about potential intervention by Japan.
“Today’s data undeniably show strength across the economy,” said Ellen Zentner of Morgan Stanley Wealth Management. “Strong data may lead to some resistance from Fed officials against further cuts in November, but Chair Jerome Powell is unlikely to be swayed and will likely continue with steady, quarter-point moves.”
Jeff Roach of LPL Research noted that robust consumer spending in September indicates that economic growth in the previous quarter was significantly above trend. Going forward, investors should monitor any signs of difficulty for the unemployed in finding work.
“Retail sales significantly exceeded expectations and continue to defy the narrative of a weak economy,” said Quincy Krosby of LPL Financial. “The implications for monetary policy revolve around whether the Fed is concerned that the renewed strength in the economy will lead to an increase in inflation, although expectations remain that there will be a 25 basis-point cut at the next meeting.”
A series of stronger-than-expected data points pushed the US version of Citigroup’s Economic Surprise Index to its highest level since April. The index measures the difference between actual data releases and analyst forecasts.
According to Bret Kenwell of eToro, if the data continues to be strong, investors may need to lower their expectations for future Fed rate cuts.
“While rate cuts do have an impact on the market, they are not the only factor at play. Consider how well the market has performed this year despite fluctuations in interest rate expectations as earnings and the strength of the economy have driven stocks higher,” he observed. “As long as these foundations remain strong, equities should continue to perform well.”
While US stocks are nearing record levels, one group of investors—systematic funds—is reducing its equity exposure due to increasing price volatility. However, history suggests that this trend will reverse after the election.
The CBOE Volatility Index, or VIX, is currently trading near 20, higher than its average of 15 throughout the year until September. This has created selling pressure for rule-based systematic funds that typically follow market trends.
Historically, price volatility tends to rise leading up to the US Presidential Election due to political uncertainty, before subsiding shortly after, according to Tanvir Sandhu, Bloomberg Intelligence’s chief global derivatives strategist.
Corporate Highlights:
Allstate Corp. reported $630 million in catastrophe losses in September related to Hurricane Helene.
Amazon.com Inc.’s Amazon Web Services stated that new systems using Nvidia Corp.’s Blackwell chips may not be operational until early next year.
Boeing Co. filed to sell up to $25 billion in equity and bonds this week, but the aircraft manufacturer is still awaiting the usual immediate approval from regulators.
CSX Corp. received a subpoena from the US Securities and Exchange Commission focused on previously disclosed accounting errors and certain non-financial performance metrics.
The US Federal Trade Commission is investigating tractor giant Deere & Co. over concerns that its agricultural equipment repair practices may violate antitrust or consumer protection laws.
Expedia Group Inc. saw gains after the Financial Times reported that Uber Technologies Inc. had explored a potential bid for the online travel booking company.
Blackstone Inc. reported an increase in profits as its credit division received an influx of investor funds, becoming the firm’s largest business in terms of assets.
Key events this week:
China GDP, Friday
US housing starts, Friday
Fed speakers Christopher Waller and Neel Kashkari, Friday
Some of the main market movements:
Stocks
The S&P 500 remained relatively unchanged as of 4 p.m. New York time
The Nasdaq 100 also remained relatively unchanged
The Dow Jones Industrial Average rose by 0.4%
The MSCI World Index remained relatively unchanged
Currencies
The Bloomberg Dollar Spot Index rose by 0.1%
The euro fell by 0.3% to $1.0828
The British pound rose by 0.2% to $1.3013
The Japanese yen fell by 0.4% to 150.21 per dollar
Cryptocurrencies
Bitcoin fell by 1.2% to $66,821.87
Ether fell by 0.9% to $2,595.23
Bonds
The yield on 10-year Treasuries rose by seven basis points to 4.09%
Germany’s 10-year yield rose by two basis points to 2.21%
Britain’s 10-year yield rose by two basis points to 4.09%
Commodities
West Texas Intermediate crude oil rose by 0.5% to $70.76 per barrel
Spot gold rose by 0.7% to $2,692.07 per ounce
This story was produced with the assistance of Bloomberg Automation.
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