Strong Bond Market Gains as Retail Sales Data Boosts Hopes for Fed Rate Cuts

The bond market rallied significantly this week, extending gains for a fifth consecutive week, its longest run since 2021. The 10-year Treasury yield retreated below 4.5% as a tepid retail sales report rekindled expectations of Federal Reserve interest rate cuts.

Money markets are now fully pricing in an initial Fed rate reduction by September. The S&P 500 hovered near its all-time highs, while the dollar hit a new low for 2023.

According to the report, US retail sales declined by the most in nearly two years in January, signaling a sharp pullback by consumers after a spending spree in late 2024.

"Consumer sentiment was already jittery, and today's weak retail sales data confirmed it," said David Russell at TradeStation. "However, the resulting slack is positive for the Fed and tips the balance towards rate cuts."

At Interactive Brokers, Jose Torres suggests that the weak consumption report reopens the possibility of a Fed reduction this summer, a scenario that had been dampened by a higher-than-expected inflation report earlier this week.

The S&P 500 remained largely unchanged, while the Nasdaq 100 gained 0.4% and the Dow Jones Industrial Average shed 0.4%. Meta Platforms Inc. extended its rally for a 20th consecutive session. Dell Technologies Inc. surged on news of a potential $5 billion server deal for Elon Musk's xAI. Intel Corp. fell on Friday but still closed with its best weekly performance since 2000.

"Consumers cut back on spending after the holiday season, but they were still willing to splurge on dining out," said Ellen Zentner at Morgan Stanley Wealth Management. "This indicates that households remain confident in the economy despite rising policy uncertainty."

Gary Schlossberg at Wells Fargo Investment Institute believes that evidence of slowing activity is not sufficient to offset recent indications of firming inflation, which reduces the likelihood of an early rate cut by the Fed.

"Are consumers simply taking a break?" said Bret Kenwell at eToro. "Investors should refrain from overinterpreting a single data point. Nevertheless, weaker retail sales amidst high inflation pose challenges for consumers and companies. It's too early to call it a trend, nhưng if that were to emerge, it would be worrying."

Will Compernolle at FHN Financial expresses skepticism that the report represents a true tipping point in consumer spending. He notes that bonds have moved into "overbought territory" due to an "overreaction" to Thursday's producer price index.

"The optimistic scenario from today's data is as follows: rates will ease as the economy moderates, and the consumer weakness is a temporary blip that doesn't affect investors' enthusiasm for stocks," said Steve Sosnick at Interactive Brokers. "The pessimistic scenario is far worse: both consumers and the government tighten their wallets, impacting GDP faster than the Fed can respond."

According to Bank of America Corp's Michael Hartnett, accelerating inflation in the US could ultimately benefit financial markets by compelling President Donald Trump to reduce trade tariffs. The strategist recommends investing in bonds, predicting that the 30-year Treasury yield likely peaked at around 5% in January. The yield traded near 4.7% on Friday. Hartnett also reaffirms his preference for international equities over US stocks.

"Bond yields have fluctuated this week, and their recovery has contributed to yesterday's positive rally in the stock market," said Matt Maley at Miller Tabak. "However, this appears to be more related to the inflation issue than to the war or tariffs."

Given that the stock market has been confined to a range for almost three months, Maley believes that any significant breakout above this range would be technically bullish.

Goldman Sachs Group Inc. analysis suggests that the market has been more micro-driven than usual since the start of 2023. During the past six months, company-specific factors have accounted for 74% of returns for the typical S&P 500 stock, compared to 58% on average over the past two decades.

"We expect the current micro-driven environment to persist in 2025," said strategists led by David Kostin. They emphasize that economic forecasts indicate a healthy growth environment this year, while ongoing development and adoption of artificial intelligence should create stock differentiation. Heightened policy uncertainty also suggests increased dispersion.

"Debates over trade, tax, fiscal, and other policies are likely to drive further return dispersion," they note. "A micro-driven market offers opportunities for active managers."

Corporate Highlights:

* Airbnb Inc. issued a positive forecast for the first three months of 2025, citing "continued strong demand" following a busy holiday travel season.
* Applied Materials Inc., the largest US manufacturer of chip-making equipment, provided a lukewarm revenue outlook for the current period, expressing concerns about the risk of export controls hindering its operations.
* Coinbase Global Inc. reported a more than doubling of revenue and a profit increase that exceeded projections during the previous quarter's Trump-inspired rally in digital assets.
* Dell Technologies Inc. is close to securing a multi-billion-dollar deal to provide Elon Musk's xAI with servers optimized for artificial intelligence applications.
* DraftKings Inc. shares surged as much as 15% to their highest level in nearly three-and-a-half years after the company reported fourth-quarter earnings above expectations and raised its sales guidance for the current year.
* Moderna Inc. posted a quarterly loss as vaccine sales declined and the company incurred an unexpected charge for a canceled manufacturing contract.
* Palo Alto Networks Inc. issued a disappointing earnings forecast for the current quarter, despite strong results from competitors such as Fortinet Inc. and Check Point Software Technologies Ltd.
* 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. plunged after Nvidia Corp. filed a 13F indicating that it had sold its stakes in these companies.
* Taiwan Semiconductor Manufacturing Co. may consider acquiring a controlling stake in Intel Corp.'s factories at the request of Trump administration officials, according to an individual familiar with the matter. The president aims to boost American manufacturing and maintain US dominance in critical technologies.

Market Moves:

Stocks:

* The S&P 500 remained largely unchanged as of 4 p.m. ET.
* The Nasdaq 100 gained 0.4%.
* The Dow Jones Industrial Average declined by 0.4%.
* The MSCI World Index was nearly flat.
* The Bloomberg Magnificent 7 Total Return Index rose by 0.4%.
* The Russell 2000 Index was slightly positive.

Currencies:

* The Bloomberg Dollar Spot Index shed 0.3%.
* The euro appreciated by 0.2% to $1.0491.
* The British pound gained 0.2% to $1.2586.
* The Japanese yen rose by 0.3% to 152.32 per dollar.

Cryptocurrencies:

* Bitcoin increased by 0.7% to $97,156.73.
* Ether advanced by 2.2% to $2,726.16.

Bonds:

* The yield on 10-year Treasuries decreased by five basis points to 4.48%.
* Germany's 10-year yield climbed by one basis point to 2.43%.
* Britain's 10-year yield rose by one basis point to 4.50%.

Commodities:

* West Texas Intermediate crude declined by 0.8% to $70.72 per barrel.
* Spot gold lost 1.5% to $2,884.89 per ounce.