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Bond yields rise, equities dip as US economy signals strength

By Charbel Kadib
3 minute read

Stronger-than-anticipated retail sales growth in the United States has shifted interest rate expectations yet again, prompting markets to reassess the outlook for fixed income and equities.

US retail sales grew 0.7 per cent over the month of September, far surpassing market expectations of a modest 0.3 per cent increase.

The August print has also been revised from 0.6 per cent to 0.8 per cent.

The surprise result has refuelled expectations of further interest rate hikes from the Federal Reserve as it pursues its 2 per cent inflation objective.

US equities responded in kind, with the S&P 500 and the Nasdaq index losing value, while the Dow Jones Index was flat.

Conversely, bond yields rallied in response to the retail trade figures. The US 10-year Treasury yield rose to 4.84 per cent, while US 2-year Treasury bonds rose to 5.22 per cent.

According to James Knightley, chief international economist at ING Economics, the latest retail sales print suggests the US economy is more resilient than initially anticipated and supports forecast for GDP growth of 4 per cent in the year to 30 September 2023.

“Coupled with the recent strong jobs numbers and hot inflation, it is no surprise that Treasury yields push higher,” he said.

He said these latest economic indicators would support the case for a “higher for longer” monetary policy strategy from the Federal Reserve.

“While Fed officials may be coalescing around the view that further policy rate hikes may not be needed, the prospect of interest rate cuts is in the far-off future and the yield curve needs to continue repricing for that,” he said.

However, Mr Knightley said he ultimately expects US economic conditions to deteriorate, starting with a marked slowdown in the fourth quarter of 2023.

“We continue to think that the constraints facing the household sector of falling real household disposable income, reduced credit availability, more and more households running down accrued pandemic era savings and the resumption of student loan repayments will eventually lead to weaker consumer spending numbers,” he said.

“It isn’t happening yet though and will mean market rates continue to move higher with mortgage rates, car loans, and credit card borrowing rates inevitably following suit, which will only add to the headwinds for consumer spending as we move into 2024.”

The strong retail sales result follows recent remarks from Fed officials, which hinted the tightening cycle may have passed its peak.

Atlanta Fed president Raphael Bostic said he’s confident a soft landing would be achieved after 500 bps in cumulative hikes to the funds rate since March 2022.

“I actually don’t think we need to increase rates anymore,” Mr Bostic told the American Bankers Association.

“…We have clearly moved into a restrictive place – the economy is clearly slowing down – and a lot of our policy impact has yet to come.”

The next Federal Open Market Committee (FOMC) is scheduled for 31 October.