- US retail sales fell by an unexpected 0.8% in January, indicating a decline in consumer spending.
- A report by the Labor Department showed a decline in initial jobless claims.
- Foreign holdings of US Treasury securities hit another record high in December.
After a surprise decline in retail sales renewed rate-cut bets, interest futures rose on Thursday. On the other hand, the report sent Treasury yields lower. The decrease in retail sales indicated a slowing economy, reducing some of the impact of the upbeat inflation report on Tuesday. Meanwhile, investors also assessed labor market data.
US retail sales (Source: US Commerce Department)
US retail sales fell by an unexpected 0.8% in January, indicating a decline in consumer spending. Notably, consumer spending drives the economy. When consumers are less willing to spend, it shows slowing demand. This is precisely what the Fed wants to see to start cutting interest rates.
Moreover, the sales report relieved investors after the inflation report dimmed hopes of early rate cuts. Earlier in the week, interest futures plunged after the US revealed hotter-than-expected inflation in January. The rate cut bets fell significantly after the report.
At the same time, yields surged as it became clear that the Fed would hold high-interest rates for longer. However, the retail sales figures renewed hope for a May rate cut. Notably, the likelihood of a May cut rose to 40% after the report. Meanwhile, investors see an 82% chance that the Fed will cut rates in June.
Other data on Thursday revealed that foreign holdings of US Treasury securities hit another record high in December. This increase came when markets expected the Fed to cut interest rates as early as March. Moreover, policymakers took a dovish stance towards the end of 2023, leading to a drop in Treasury yields. Meanwhile, interest futures rose throughout November and December.
However, the outlook for interest rates in the US changed dramatically in 2024. Most market participants are now expecting the first rate cut in June. Consequently, data for January could show a decline in demand for US Treasury bonds. Still, as long as inflation continues on its downtrend, the Fed will eventually start cutting rates. As a result, there is upside potential for interest futures.
Elsewhere, there was little reaction to another report by the Labor Department showing a decline in initial jobless claims. Another reason for the recent decrease in rate-cut bets is labor market strength. Labor market demand has remained stubborn, allowing the Fed to push back on rate-cut expectations.
