Strong Retail Sales Send Rates Higher Across the Curve

Treasury yields and swap rates reverse course, climb 4-8 basis points to end the week. A hot retail sales figure was all it took to send rates sharply higher across a steepening curve, reversing much of the bull flattening that had occurred in the prior three sessions. The 10-year Treasury yield climbed 6 basis points but the biggest move was actually in the belly of the curve where 5-year rates rose nearly 8 basis points to close at 1.125%- the highest level since February 2020.

September retail sales surprise to the upside as consumer demand holds strong. U.S. retail sales increased 0.7% month-over-month in September, crushing analysts’ estimates of a 0.2% decrease. The Commerce Department also revised August’s gain upward to 0.9%. Eleven of the thirteen retail categories made gains during the month, lead by spending on goods and merchandise as spending on services slightly slowed due to rising COVID cases. The consumer demand in September presently reveals that customers have so far been resilient to recent price increases.

Consumer sentiment falls to second-lowest reading since 2011. In contrast to the strong retail sales of September, the U.S. consumer sentiment continued its downward trend in October. The University of Michigan’s preliminary index fell to 71.4, down from 72.8 in September, and below analyst expectations of 73.1. Consumers continue to be cautious of rising inflation with inflation expectations over the next twelve months hitting 4.8% in the report; the highest reading since 2008.