Retail Sales Spurs a 5-14bp Rate Climb

Rates soar on strong retail sales. This morning’s retail sales data showed signs of robust consumer spending, which led to concerns about prolonged inflationary pressures. Rates soared 5-14bps across a bear flattening curve as a result, pushing the 2-year Treasury yield to ~4.09%. Initial jobless claims also contributed as the data was below expectations and the lowest level since early last month. Yields are just ~5bps lower than their levels pre-July labor market data that showed rising unemployment and slowed hiring, which spurred a 15-30bp intraday rate decline and talks of an emergency FOMC meeting.

Consumer spending surprises to the upside. July retail sales data (released today) were higher than expected across all measurements. On a month-over-month basis, headline sales grew 1.0% vs. 0.4% surveyed estimates, above last month’s downwardly revised decline of 0.2%. On both a core (ex. auto) and super core (ex. auto and gas) basis, retail sales grew 0.4% vs expectations of 0.2% and 0.1% growth, respectively. The release was viewed as a continued sign of consumer resilience despite high prices, softer labor market data and economic uncertainty. However, some are questioning the sustainability of consumer spending given exhausted pandemic era savings and elevated consumer debt. Per a recent NY Fed survey, the average likelihood of consumers missing a minimum debt payment over the next 3 months climbed to 13.3%, the highest since April 2020.

The Fed is currently contributing to the US deficit. Growing US government debt is a hot topic and an integral component of current election campaigns. High rates have pushed the Fed to become a significant contributor as its interest expense on over $3 trillion of reserves exceeds the income made on its (dwindling) bond holdings. Recent data showed that the Fed added ~$100 billion in deficit for the government over the past year. September’s FOMC meeting is likely to reduce the Fed’s interest expense, as Fed Funds futures currently have ~32bps of rate cuts priced in.