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An “explosive” March retail sales report sparked a selloff in U.S. government debt and rattled global currency markets on Monday, the latest sign that the world’s largest economy may be too hot to warrant a rate cut of interest.
U.S. retail sales were much stronger than expected in March as consumers continued to spend despite uncertainty over future interest rate developments.
U.S. Census Bureau data released Monday showed that retail sales, which include spending on food and gasoline, rose 0.7 percent last month. Economists polled by Reuters had expected a rise of 0.3 percent.
The figure for February was revised upwards from a 0.6 percent rise to 0.9 percent, indicating the resilience of consumer spending at the start of the year and providing further evidence of a reacceleration of economic growth.
“That retail sales number was profoundly strong. . . I had to revise my GDP expectations upwards because of retail sales,” said Tom Simons, US economist at Jefferies. He now expects first-quarter gross domestic product growth to reach 3.1 percent, up from a previous estimate of around 2.2 percent, close to the Wall Street consensus.
The Atlanta Fed’s GDP nowcast, a rolling forecast that incorporates newly released data, was updated Monday following the retail sales report. The first quarter estimate is now 2.8 percent, up from 2.4 percent.
Expectations of higher growth were accompanied by expectations that inflation would also remain high. Market measures of inflation expectations rose recently after three straight months of stronger-than-expected data and jumped again after the Census Bureau’s release.
“You can’t stop the American consumer when they are fully employed and wage growth remains near multi-decade highs,” said Charlie McElligott, managing director of multi-asset strategy at Nomura.
Aditya Bhave, an economist at Bank of America, wrote in a note to clients that March’s “explosive” retail sales numbers were “unequivocally strong.”
“Some of March’s gains seem idiosyncratic, but the overall message is one of consumer resilience,” he said.
U.S. Treasury prices fell immediately after the data was released, pushing yields higher.
Yields on benchmark 10-year bonds, which move based on growth and inflation expectations, hit a five-month high of 4.66 percent on Monday morning. The two-year yield, which moves with interest rate expectations, inched closer to its five-month high, up 0.05 percentage points to 4.95 percent.
The five-year breakeven inflation rate – a market measure of five-year inflation expectations – reached its highest level since March 2023. The breakeven inflation rate is generally very sensitive to oil prices, which have fell on Monday but remain close to a five-month high.
In foreign exchange markets, strong retail sales figures boosted the U.S. dollar index, which tracks the world’s dominant currency against six of its international peers.
The yen fell 0.7 percent past ¥154 per dollar for the first time since 1990, as traders slightly reduced their bets on rapid rate cuts from the Federal Reserve, strengthening the dollar . U.S. stock markets were down slightly that day.
Markets now anticipate between one and two quarter points of rate reduction by the Fed in 2024, whereas they expected between six and seven just four months ago.
Additional reporting by Stephanie Stacey in London
