March Retail Sales Report Triggers Sell-Off in US Government Debt and Shakes Global Currency Markets

In surprising news, the release of a “blowout” March retail sales report has sent shockwaves through the global market, resulting in a sell-off in US government debt and upheaval in currency markets. The report has raised concerns that the US economy is overheating, potentially negating the need for further interest rate cuts. Amidst the uncertainty, we delve into the implications of this startling sales data.

Unforeseen Retail Sales Spike

According to data from the US Census Bureau, retail sales, including spending on food and petrol, rose a staggering 0.7% in March. This exceeded economists’ previous expectations of a mere 0.3% increase for the month. Moreover, the figure for February was revised upward from 0.6% to a solid 0.9%, showcasing continued robust consumer spending and a remarkable resurgence in economic growth.

Tom Simons, US economist at Jefferies, commented, “That retail sales number was profoundly strong…I had to mark up my GDP expectations because of retail sales.” He now predicts first-quarter gross domestic product (GDP) growth to reach 3.1%, up from the previous estimate of 2.2%, aligning closer with the consensus estimate on Wall Street.

The Atlanta Fed’s GDP “nowcast,” a real-time rolling forecast, unveiled an updated estimate of 2.8% for the first quarter following the report, up from 2.4%.

Heightened Growth and Inflation Expectations

An upswing in growth forecasts was accompanied by an anticipation of higher inflation. Market measures of inflation expectations have surged in response to the three consecutive months of stronger-than-expected data, and escalated further following the release of the Census Bureau’s report.

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

Aditya Bhave, an economist at Bank of America, echoed the sentiment by remarking that March’s retail sales figures were “unequivocally strong,” with certain gains appearing idiosyncratic, yet still pointing towards consumer resilience.

Market Instability and Currency Impact

News of the robust retail sales figures rapidly affected US Treasuries, prompting a drop in prices and subsequently pushing yields higher. Yields on the benchmark 10-year note, which correspond to growth and inflation expectations, reached a five-month high of 4.63% on Monday. Likewise, the two-year yield, influenced by interest rate expectations, inched towards a five-month high, surging by 0.05 percentage points to 4.94%.

Further signaling potential inflationary concerns, the five-year inflation break-even — a market measure of inflation expectations five years into the future — reached its highest level since March 2023. Unaffected by Monday’s drop in oil prices, the break-even emphasizes the market’s sensitivity to oil prices, which still remain near a five-month peak.

Interest rate-sensitive tech stocks felt the impact of rising Treasury yields, leading to a sharp decline in US equities markets, with the S&P 500 index finishing 1.2% lower. This downturn, reminiscent of the 2022 market climate during a brutal sell-off, sparked concerns raised by Torsten Slok, chief economist at Apollo.

Summarizing the origins of anxiety, Slok stated, “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.”

As a result, market expectations for rate cuts have been readjusted, now predicting between one and two quarter-point rate cuts by the Federal Reserve in 2024, significantly lower than the prior forecast of six to seven cuts just four months earlier.

Additional reporting by Stephanie Stacey in London