Wall Street Dials Back Fed-Cut Bets on Solid Data: Markets Wrap

(Bloomberg) -- The world’s biggest bond market got hit as a solid retail sales report had traders trimming their bets on Federal Reserve rate cuts this year.

Treasury yields climbed as the economic figures fanned doubts over how quickly the central bank will ease policy. Swap contracts priced in a total of 42 basis points of rate reductions over the November and December meetings. An advance in equities fizzled out after the S&P 500 hit fresh all-time highs. In late trading, Netflix Inc. rallied as subscriber additions beat estimates.

US retail sales strengthened in September by more than forecast in a broad advance, illustrating resilient consumer spending that continues to power the economy. The data followed a blowout jobs report and a hotter-than-estimated consumer inflation print released earlier this month that only reinforced the view the economy is nowhere near a recession.

“There’s a narrow path toward a Fed pause in November, but it would likely require every notable economic report between now and then indicating a stronger-than-assumed US economy,” said Matthew Weller at Forex.com and City Index. “Regardless of what the Fed does in November though, the projected path for interest rates looking out into 2025 and beyond is higher than it’s been in weeks.”

The S&P 500 and the Nasdaq 100 were little changed. The Dow Jones Industrial Average added 0.4%. Nvidia Corp. gained after a bullish outlook from Taiwan Semiconductor Manufacturing Co. Travelers Cos. surged 9% on profit that tripled to $1.3 billion from a year earlier. Elevance Health Inc. tumbled 11% as the insurer cut its annual outlook.

Treasury 10-year yields advanced seven basis points to 4.09%. The euro fell as traders added to bets the European Central Bank will need a bumper rate cut in December. The yen slid to touch the key psychological level of 150 per dollar, bringing the risk of intervention by Japan back into focus.

“This morning’s data highlight undeniable strength across the economy,” said Ellen Zentner at Morgan Stanley Wealth Management. “Strong data will encourage some pushback from Fed participants to cutting again in November, but Chair Jerome Powell is unlikely to be swayed from forging ahead with steady, quarter-point moves.”

Jeff Roach at LPL Research says strong consumer spending in September suggests economic growth in the previous quarter was solidly above trend. Looking ahead, investors need to monitor any signs that the unemployed are finding it more difficult to earn a paycheck. 

“Retail sales came in well above expectations and continue to defy the weak economy thesis,” said Quincy Krosby at LPL Financial. “The implications for monetary policy center on whether the Fed worries that the renewed strength in the economy fuels an uptick in inflation, although expectations remain that there will be a 25 basis-point cut at the next meeting.”

A string of stronger-than-estimated data points sent the US version of Citigroup’s Economic Surprise Index to the highest since April. The gauge measures the difference between actual releases and analyst expectations.

To Bret Kenwell at eToro, if the data continues to come in strong, it could force investors to lower their expectations of Fed rate cuts going forward. 

“While rate cuts do matter for the market, they’re not the only thing that matters. Consider how well the market has done this year despite wild fluctuations in interest rate expectations, as earnings and the economy have powered stocks higher,” he noted. “So long as these pillars remain in place, it should bode well for equities.”

While US stocks are hovering near a record, at least one group of investors — sytematic funds — is reducing its equity exposure amid rising price swings. But if history is any guide, the trend will reverse after the election. 

The CBOE Volatility Index, or the VIX, is trading near 20, up from its average reading of 15 this year through September. That’s created selling pressure for rules-based systematic funds that typically take cues from the market direction.

Historically, price swings tend to rise leading up to the US Presidential Election as political uncertainty gets on traders’ nerves, before subsiding shortly after, says Tanvir Sandhu, Bloomberg Intelligence’s chief global derivatives strategist.

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This story was produced with the assistance of Bloomberg Automation.

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