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U.S. bond yields were little changed Wednesday morning after data showed retail sales grew by a surprising 3% at the start of the year and could contribute to better-than-expected economic growth in the first quarter.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.630%
was 4.618% versus 4.620% on Tuesday. Tuesday’s level was the highest since Nov. 9, based on 3 p.m. figures from Dow Jones Market Data. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.802%
was 3.756%, marginally off from 3.760% late Tuesday. Tuesday’s level was the highest since Jan. 3. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.846%
was little changed at 3.796% from 3.801% as of Tuesday afternoon.
What’s driving markets
In data released on Wednesday, sales at U.S. retailers jumped in January by the most in almost two years, and beat the 1.9% advance expected by economists.
The data undercut the narrative that the economy might be heading into a recession during the first quarter. Instead, the report pointed to signs that the economy is still growing and bolstered the scenario of a possible “no-landing” outcome.
Meanwhile, the New York Fed’s Empire State gauge of manufacturing activity in the state remained in contractionary territory in February for a third month, at minus 5.8. U.S. industrial output was flat in January, continuing a weak trend.
Data on Tuesday showing that the annual headline rate of the consumer-price index still increased by 6.4% for January helped push the policy-sensitive 2-year Treasury yield back above 4.6% as investors bet that the Federal Reserve will have to keep raising its policy interest rate.
Markets are pricing in a 91% probability that the Fed will hike the fed funds rate by another 25 basis points to a range of 4.75% to 5% on March 22, according to the CME FedWatch tool. Meanwhile, expectations for a rate cut have moderated.
Elsewhere, the U.K. inflation rate continued to moderate in January, but remained in double digits at 10.1%. The yield on 10-year gilts
TMBMKGB-10Y,
fell 8 basis points to 3.444%.
What are analysts saying
“The massive 3.0% m/m surge in retail sales in January may have been partly related to the unseasonably mild winter in the Northeast but, alongside the unexpected strength of payroll employment, it nevertheless suggests the economy will easily avoid a recession in the first quarter,” said Paul Ashworth, chief North America economist at Capital Economics.
“Regardless of potential weather effects or seasonal issues, the bottom line is that first-quarter consumption growth will be much stronger than we previously expected and, as a result first-quarter GDP will be positive. Under those circumstances, there are now clearly upside risks to our view that the fed funds rate will peak slightly below 5%,” he wrote in a note.
