(Bloomberg) — The world’s largest bond market experienced a downturn following a strong retail sales report that led traders to scale back their expectations of Federal Reserve rate cuts for the year.
Treasury yields rose as the positive economic data raised questions about the pace at which the central bank would implement policy easing. Swap contracts indicated a total of 42 basis points of rate reductions during the November and December meetings. Equities initially saw gains after the S&P 500 reached new all-time highs, but the momentum faded. Netflix Inc. saw a boost in late trading as subscriber additions exceeded estimates.
The US retail sales report for September surpassed expectations with a broad increase, demonstrating robust consumer spending that continues to drive the economy. This data followed a strong jobs report and higher-than-expected consumer inflation figures earlier in the month, further reinforcing the belief that a recession is not imminent.
“There is a narrow possibility of a Fed pause in November, but it would likely require all significant economic reports leading up to then to indicate a stronger-than-expected US economy,” said Matthew Weller of Forex.com and City Index. “Regardless of the Fed’s decision in November, the projected trajectory for interest rates beyond 2025 is higher than it has been in weeks.”
The S&P 500 and the Nasdaq 100 saw minimal changes, while the Dow Jones Industrial Average rose by 0.4%. Nvidia Corp. saw gains following a positive outlook from Taiwan Semiconductor Manufacturing Co. Travelers Cos. surged by 9% due to a tripling of profits to $1.3 billion compared to the previous year. Conversely, Elevance Health Inc. experienced an 11% decline as the insurer revised its annual outlook downwards.
Treasury 10-year yields increased by seven basis points to 4.09%. The euro weakened as traders speculated on the possibility of a significant rate cut by the European Central Bank in December. The yen also declined, reaching the key psychological level of 150 per dollar, raising concerns about potential intervention by Japan.
“The morning’s data undeniably highlight the strength of the economy,” said Ellen Zentner of Morgan Stanley Wealth Management. “Strong data may lead some Fed members to resist another rate cut in November, but Chair Jerome Powell is likely to proceed with gradual, quarter-point adjustments.”
Jeff Roach of LPL Research suggested that the robust consumer spending in September indicates that economic growth in the previous quarter exceeded expectations. Moving forward, investors should pay attention to any signs of challenges for the unemployed in securing employment.
“Retail sales significantly exceeded expectations and continue to contradict 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 economic strength will lead to an increase in inflation, although the general expectation is still for a 25 basis-point cut at the next meeting.”
A series of better-than-expected data points drove the US version of Citigroup’s Economic Surprise Index to its highest level since April. The index measures the variance between actual releases and analyst forecasts.
According to Bret Kenwell of eToro, if the data continues to show strength, investors may need to adjust their expectations regarding future Fed rate cuts.
“While rate cuts do impact the market, they are not the sole determining factor. Despite significant fluctuations in interest rate expectations this year, the market has performed well due to strong earnings and economic growth driving stock prices higher,” he noted. “As long as these fundamentals remain intact, equities should continue to perform positively.”
Although US stocks are close to record highs, a subset of investors – systematic funds – are reducing their equity exposure due to increased price volatility. However, historical trends suggest that this trend may reverse post-election.
The CBOE Volatility Index, or VIX, is currently around 20, higher than its average of 15 for the year up to September. This has created selling pressure for rule-based systematic funds that typically follow market trends.
Historically, price volatility tends to rise in the lead-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:
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Allstate Corp. reported $630 million in losses related to Hurricane Helene in September.
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Amazon.com Inc.’s Amazon Web Services announced a delay in the launch of systems featuring Nvidia Corp.’s Blackwell chips, now expected in early next year.
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Boeing Co. filed to sell up to $25 billion in equity and bonds this week, awaiting regulatory clearance.
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CSX Corp. received a subpoena from the US Securities and Exchange Commission related to previously disclosed accounting errors and non-financial performance metrics.
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The US Federal Trade Commission is investigating Deere & Co. over potential violations of antitrust or consumer protection laws in its agricultural equipment repair practices.
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Expedia Group Inc. saw an increase in its stock price following reports that Uber Technologies Inc. was exploring a bid for the online travel-booking company.
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Blackstone Inc. reported higher profits, with its credit arm becoming the firm’s largest business by assets due to increased investor inflow.
Key events this week:
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China GDP release on Friday
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US housing starts data on Friday
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Speeches by Fed’s Christopher Waller and Neel Kashkari on Friday
Some key market movements:
Stocks
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S&P 500 remained unchanged as of 4 p.m. New York time
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Nasdaq 100 saw minimal changes
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Dow Jones Industrial Average rose by 0.4%
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MSCI World Index remained unchanged
Currencies
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Bloomberg Dollar Spot Index increased by 0.1%
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Euro declined by 0.3% to $1.0828
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British pound rose by 0.2% to $1.3013
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Japanese yen fell by 0.4% to 150.21 per dollar
Cryptocurrencies
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Bitcoin fell by 1.2% to $66,821.87
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Ether fell by 0.9% to $2,595.23
Bonds
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10-year Treasury yield increased by seven basis points to 4.09%
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Germany’s 10-year yield rose by two basis points to 2.21%
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Britain’s 10-year yield rose by two basis points to 4.09%
Commodities
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West Texas Intermediate crude oil rose by 0.5% to $70.76 per barrel
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Spot gold increased by 0.7% to $2,692.07 per ounce
This article was created with the assistance of Bloomberg Automation.
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