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Robust Retail Sales Spark Fed Speculation

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US stocks and Treasuries both bounced as investors weighed the implications of the better-than-expected retail sales report.  The Commerce Department said retail sales surged 1.3% in April, the biggest gain since March 2015, and easily exceeding the 0.8% increase economists were forecasting.  The strength was broad-based, with 11 out of 13 major retail categories experiencing increases last month.  The data suggests the US economy may be gaining traction after a sluggish start to the year for the consumer, which could have implications for Fed policy.  The strong data followed yesterday’s hawkish comments from both Boston Fed President Rosengren and Kansas City Fed President George.  Both officials argued that the Fed risks stoking an asset bubble by delaying monetary policy action for too long, and that the central bank must act if data continues to point to an improving economy.  The retail sales report appears to fit that description.  A separate report also released this morning showed US consumer sentiment rose to the highest level since June. 

Despite the upbeat US data, market risk appetite was held in check somewhat by a fall in oil prices.  Militant attacks in Nigeria, which have derailed output by as much as 600,000 barrels per day, overshadowed plans for Canadian producers to resume operations following the massive wildfires earlier this week.  Additionally, OPEC said global oil markets remain oversupplied and the glut could increase as the year goes on.  The addition of fresh supply from Iran and the inability for OPEC and non-OPEC producers to reach a supply control plan, continues to weigh on the outlook.
San Francisco Fed President Williams speaks this evening after the market close.  All three major US stock indexes are trading close to unchanged, while the US yield curve has flattened today with Treasury yields and swap rates are marginally higher in the short end of the curve and lower 1-3 bps in the belly and long end.


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