With retail sales data in the United States, known as "terrifying data", quickly igniting expectations of the Federal Reserve raising interest rates on Tuesday, the US bond market once again "exploded"
It seems not an exaggeration to use the phrase "thunderbolt like string shock" to describe the shock brought to financial markets by the US economic data represented by retail data overnight. According to data released by the US government on Tuesday, retail sales growth in September exceeded expectations, and industrial output growth also significantly strengthened. This is the latest evidence that resilient consumer spending helped stabilize the US manufacturing industry.
According to data from the US Department of Commerce, total retail sales in September, which were not adjusted for inflation, increased by 0.7% month on month, while data from the previous two months were also revised up. The so-called control group sales (excluding cars, gasoline, building materials, and food services) used to calculate commodity expenditures in the Gross Domestic Product (GDP) report increased by 0.6%, which was also significantly better than expected.
In the three months ended September, sales of the control group excluding food services, car dealerships, building materials stores, and gas stations increased at an annualized rate of 6.4%. This is the largest quarter end gain since June 2022.
Retail sales account for about one-third of all consumer spending in the United States, and typically provide the best clue about the strength of the US economy. The latest strong growth in retail sales data clearly indicates that American consumers are still contributing to the economy and do not seem to be deterred by high prices. Consumer spending may still be driven by the hot labor market, ignoring economists' expectations of a slowdown in household savings related to the pandemic.
Omair Sharif, President of Inflation Insights LLC, stated in a report that the weakness of American consumers has been significantly exaggerated, which is a comprehensive positive report showing continued strong consumer spending, including revised control group sales data.
Another US data released on the same day also showed that strong demand is giving US manufacturers a boost. A Federal Reserve index measuring US manufacturing output rose to its highest level in nearly five years in September, with mining and manufacturing leading the way. The output of the manufacturing industry has been boosted by the rebound in both consumer goods and construction supply value. As retailers make progress in coordinating inventory and demand, the manufacturing industry has also found a foothold to some extent.
Priscilla Thiagamorthy, senior economist at BMO Capital Markets, stated in a report that despite some resistance (including the UAW strike), strong American consumers continue to drive demand and provide support for factories to continue moving forward.
Two year US Treasury yields hit a new 17 year high
After the comprehensive improvement of US economic data released on Tuesday, the "US debt storm" that ravaged global financial markets for most of this autumn also made a comeback overnight with a strong wind sweeping away the fallen leaves.
The yields on US Treasury bonds of all maturities collectively rose on Tuesday, with the two-year yield rising 11.5 basis points to 5.224%, further breaking the highest level since 2006.
The yield of five-year treasury bond rose 15.6 basis points to 4.878% on Tuesday, once hitting the highest level since July 2007 (the cycle peak was 5.23% in June 2006);
The 10-year US Treasury yield also surged 12.9 basis points overnight to 4.842%, while the sword of bearish bond markets further pointed towards the 5% mark. The 30-year US Treasury yield rose 7.6 basis points to 4.931%.
Kim Rupert, Global Fixed Income Managing Director of Action Economics, said, "There is currently a strong bearish bias and momentum in the bond market. This has driven potential buyers away from the market
He cited various market concerns. The main factors are the possibility of the Federal Reserve raising interest rates and the fact that the economy is still far stronger than expected. Therefore, this indicates that inflation will not decline as quickly as everyone hopes. Investors also hope to receive higher term premiums or compensate for risks, while concerns about the collapse of Silicon Valley banks in March and the subsequent downgrade of the US sovereign credit rating persist
Currently, with the continued hot performance of US economic data, Morgan Stanley economists have raised their expectations for US GDP growth in the third quarter to 4.9%. JPMorgan Chase is expected to grow by 4.3%, and Goldman Sachs has also raised its forecast to 4%.
The Federal Reserve's interest rate hike alert has been raised again
The hot US economic data performance on Tuesday clearly further exacerbated concerns that interest rates may remain high for a longer period of time.
The data from the interest rate swap market shows that the market's expectations for further rate hikes by the Federal Reserve increased significantly on Tuesday. The probability of the Federal Reserve raising interest rates at least once before the end of January next year has reached over 60%, and the probability of raising interest rates in December this year has also reached about 50% again.
Thiagamoorthy of BMO stated that although this may not be enough to stop the Fed from taking a wait-and-see stance in November, the resilient US economy means that the Fed's work on cooling the economy and restoring price stability may not be completed yet.
Edward Moya, Senior Market Analyst for the Americas at Oanda, said: "Good economic news has once again become bad news because it will leave policy makers with the door open to implementing more tightening policies. The US economy does not seem ready for a recession
Investors are also expected to closely monitor the speeches of Federal Reserve officials for the rest of this week, including the statement by Federal Reserve Chairman Powell on Thursday, in search of further clues about interest rate policy. This weekend, the Federal Reserve will officially enter a period of silence before its November interest rate meeting.