Bonds Rally as Weak Retail Sales Bolster Fed Bets: Markets Wrap

This content was published on February 15, 2025 - 00:24

8 minutes

(Bloomberg) — The bond market ended the week with solid gains as a soft reading on retail sales revived bets on Federal Reserve rate cuts.

A rally in Treasuries pushed the 10-year yield below 4.5%, with the bond notching its fifth straight week of gains — the longest run since 2021. Money markets are back to fully pricing in a first Fed reduction by September. The S&P 500 hovered near its all-time highs. The dollar hit a fresh low for 2025.

US retail sales slumped in January by the most in nearly two years, indicating an abrupt pullback by consumers after a spending spree in the closing months of 2024. The value of retail purchases, not adjusted for inflation, decreased 0.9% after an upwardly revised 0.7% gain in December.

“The consumer sentiment report showed people were getting nervous and today’s weak retail sales number confirmed it,” said David Russell at TradeStation. “However, the resulting slack is good news for the Fed and tilts the balance a little bit more toward rate cuts.”

At Interactive Brokers, Jose Torres says the weak consumption report is reopening the door to a potential Fed reduction this summer, a prospect that was dampened by a “piping hot” inflation print earlier this week.

The S&P 500 was little changed. The Nasdaq 100 added 0.4%. The Dow Jones Industrial Average fell 0.4%. US markets will be closed Monday for Presidents’ Day. Meta Platforms Inc. rose for a 20th consecutive session. Dell Technologies Inc. jumped on news it’s near an over $5 billion server deal for Elon Musk’s xAI. Intel Corp. fell Friday, but closed with its best week since 2000.

The yield on 10-year Treasuries declined five basis points to 4.48%. The Bloomberg Dollar Spot Index fell 0.3%.

“Consumers pulled back hard on spending after a generous holiday season, but they were still willing to open their pocketbooks when it came to dining out,” said Ellen Zentner at Morgan Stanley Wealth Management. “This suggests households remain confident in the economy even as policy uncertainty has risen.”

To Gary Schlossberg at Wells Fargo Investment Institute, evidence of slowing activity isn’t enough to offset recent signs of firming inflation and shift expectations back to an early rate cut by the Fed.

“Are consumers taking a break?” said Bret Kenwell at eToro. “Investors should be careful not to extract too much meaning from one data point. However, weaker retail sales amid increasing or stubbornly high inflation is a burden for US consumers and companies. It’s too early to call it a trend, but if that trend were to develop, it would be a troubling sign.”

Will Compernolle at FHN Financial says he’s skeptical the report signals a true inflection point in consumer spending. Paired with an “overzealous reaction” to Thursday’s producer price index, bonds have moved into “overbought territory,” he said.

“The positive scenario from today’s data is this: rates ease as the economy moderates and the consumer weakness is a blip that doesn’t impact investors’ love affair with stocks,” said Steve Sosnick at Interactive Brokers. “The flipside is a much worse scenario: the consumer and the government both slam their wallets shut, impacting GDP faster than the Fed is willing or able to operate.”

Faster inflation in the US could end up being a “blessing in disguise” for financial markets because it will force President Donald Trump to opt for smaller trade tariffs, according to Bank of America Corp’s Michael Hartnett.

The strategist recommended buying bonds, saying that the 30-year Treasury yield likely reached a multi-year high of about 5% in January. The yield was trading near 4.7% on Friday. Hartnett also reiterated his preference for international equities over US stocks.

“Bond yields have certainly bounced around this week, and the fact that they’ve been able to come back down played a big role in yesterday’s strong rally in the stock market,” said Matt Maley at Miller Tabak. “However, this seemed to have more to do with the inflation issue than with the war or with tariffs.”

Given that the stock market has been range-bound for almost three months now, any meaningful upside breakout of this range will be quite positive on a technical basis, Maley concluded.

An analysis conducted by Goldman Sachs Group Inc. shows that the market has been more micro-driven than average since the start of 2023. During the last six months, 74% of the typical S&P 500 stock’s returns have been driven by company-specific rather than “macro” factors vs. an average of 58% over the past two decades.

“We expect the current micro-driven environment will persist in 2025,” said the Goldman strategists led by David Kostin.

Among the factors, they said economic forecasts point to a healthy growth environment this year; continued artificial-intelligence development and adoption should create differentiation across stocks; elevated policy uncertainty also suggests elevated dispersion.

“Debates over trade, tax, fiscal, and other policies represent potential catalysts for additional return dispersion,” they noted. “A ‘micro-driven’ market creates opportunity for active managers.”

Corporate Highlights:

Airbnb Inc. issued an upbeat forecast for the first three months of 2025, citing “continued strong demand” after a bustling holiday travel season.
Applied Materials Inc., the largest US maker of chip-manufacturing equipment, issued a lukewarm revenue forecast for the current period, citing the risk of export controls crimping its business.
Coinbase Global Inc. said revenue more than doubled and profit increased more than forecast during last quarter’s Trump-inspired rally in digital assets.
Dell Technologies Inc. is in advanced stages of securing a deal worth more than $5 billion to provide Elon Musk’s xAI with servers optimized for artificial-intelligence work.
DraftKings Inc. reported fourth-quarter earnings that beat expectations and raised its sales guidance for the current year.
Moderna Inc. recorded a quarterly loss as vaccine sales waned and the company had an unexpected charge for a canceled manufacturing contract.
Palo Alto Networks Inc. issued a disappointing earnings outlook for the current quarter, despite rivals including Fortinet Inc. and Check Point Software Technologies Ltd. posting strong results.
Roku Inc., the streaming-video platform company, reported fourth-quarter results that beat expectations.
SoundHound AI Inc., Serve Robotics Inc. and Nano-X Imaging Ltd. tumbled after Nvidia Corp. filed a 13F indicating that the chipmaker exited its stakes in the companies.
Taiwan Semiconductor Manufacturing Co. is considering taking a controlling stake in Intel Corp.’s factories at the request of Trump administration officials, a person familiar with the matter said, as the president looks to boost American manufacturing and maintain US leadership in critical technologies.

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