“Explosion” of US retail sales shakes bond and currency markets

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A “strong” March retail sales report sparked a broad sell-off in U.S. government debt and rattled global currency markets on Monday, the latest sign that the world's largest economy may be too hot to justify cutting interest rates.

US retail sales were much stronger than expected in March, as consumers continued 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 gasoline, rose 0.7 percent last month. Economists polled by Reuters had expected an increase of 0.3 percent.

The February figure was revised up from 0.6 percent to 0.9 percent, indicating resilience in consumer spending earlier this year and providing further evidence of a reacceleration in economic growth.

“The retail sales number was very strong… I had to raise my GDP forecast because of retail sales,” said Tom Simons, US economist at Jefferies. He now expects first-quarter GDP growth to reach 3.1 percent, up From the previous estimate of about 2.2 percent, which was close to the Wall Street consensus.

The Atlanta Fed's GDP “nowcast”, a rolling forecast that includes new data releases, was updated Monday after the retail sales report. The first-quarter estimate is now 2.8 percent, up from 2.4 percent.

High growth expectations were accompanied by expectations that inflation would also remain high. Market measures of inflation expectations rose recently after three consecutive months of stronger-than-expected data and jumped further after the Census Bureau's release.

“You can't stop the American consumer when they are fully employed and wage growth remains near multi-decade highs,” said Charlie McElligott, managing director of multi-asset strategy at Nomura Bank.

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

“Some of the gains in March seem unique, but the overall message is one of consumer resilience,” he said.

US Treasury bond prices fell immediately after the data was released, pushing yields higher.

Yields on benchmark 10-year bonds, which move with growth and inflation expectations, rose to a five-month high of 4.63 percent on Monday. The two-year bond yield, which moves with interest rate expectations, rose to a level near a five-month high, up 0.05 percentage point to 4.94 percent.

The five-year inflation breakeven – a market measure of inflation expectations within five years – reached its highest level since March 2023. The inflation breakeven is usually very sensitive to oil prices, which fell on Monday but remained close to the inflation level. Highest level in five months.

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

The yen fell 0.7 percent beyond 154 yen to the dollar for the first time since 1990, as traders trimmed their bets slightly on quick interest rate cuts from the Federal Reserve, strengthening the dollar.

US stock markets fell sharply as Treasury yields rose, with the pain concentrated among interest rate-sensitive technology stocks. The Standard & Poor's 500 index fell 1.2 percent.

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

“What distinguished 2022 was that interest rates were rising, inflation was very high, and so there was uncertainty about when the Fed would do that, and whether the Fed would eventually cause a slowdown,” Slok said.

Markets are now pricing in cuts of between a quarter point and a quarter point by the Fed in 2024, after forecasting between six and seven just four months ago.

Additional reporting from Stephanie Stacey in London