Strong September Retail Sales Spur Treasury Sell-Off, Increase Yield -

Strong September Retail Sales Spur Treasury Sell-Off, Increase Yield

October 18, 2023

Interpreting September’s Retail Sales

In light of Tuesday’s robust September retail sales report, we saw a notable sell-off in Treasuries. Despite this, Wall Street’s major averages remained broadly stable. Particularly, the 10-year Treasury yield (US10Y) skyrocketed to a high of 4.84%, while the 2-year yield (US2Y) increased to 5.22%. A thorough evaluation of how yields are trending across the curve is advised.

A Closer Look at Retail Sales Figures

In-depth analysis reveals that September retail sales grew by a surprising 0.7% M/M, culminating in a total of $704.9B. This significant growth surpassed the predicted 0.3% increase. Core retail sales also experienced a rise of 0.6%. Numerous industry categories showcased growth; for example, auto dealers like CarMax (KMX) and Carvana (CVNA) reported an impressive 6.3% Y/Y increase. Additionally, health & personal care stores category represented by companies such as Walgreens Boots Alliance (WBA) and e.l.f. Beauty (ELF), recorded an 8.3% Y/Y increase. Furthermore, the sector encompassing giants like Walmart (WMT), Target (TGT), and Costco (COST) exhibited a modest 2% Y/Y expansion.

The Influence on Market Outlooks

According to Bankrate analyst Ted Rossman, the slightly accelerated growth in September’s retail sales versus inflation rate defies recent trends. Nevertheless, Rossman anticipates a “mild holiday season”. Besides this, expectations for more aggressive monetary policies from the Federal Reserve have escalated as chances of maintaining rates at December’s FOMC meeting reduced to 55%. Mohamed El-Erian of Allianz observed that markets are not necessarily looking to Fed officials for direction. He ascribed yield fluctuations to the rising economic uncertainties, significant fiscal deficits and “real concerns over who will readily absorb the surplus government debt associated with such high deficits.”

Financial Analysts’ Perspective

The continued resilience in consumer spending has strengthened the belief that the U.S. economy may have expanded at an annualized rate of 4% in Q3, according to ING Economic and Financial Analysis. They proposed that while Federal Reserve officials may collectively agree that further interest rate hikes are unnecessary, a chance of rate cuts remains somewhat remote for now, which could instigate continued repricing of the yield curve. Simultaneously, analyst James Picerno highlighted that agreeing on an imminent yield peak is becoming more plausible, indicating this may be a prime moment to increase allocations towards bonds.

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