S&P 500 And Treasury Yields Advance On Strong Retail Report

How Did The Markets React? 

US financial markets were on the move Friday morning in New York after the economic calendar issued the most top-tier indicators since last Wednesday. December retail sales and import inflation marked the key numbers for all asset classes, weighing in on both economic growth and inflation. Last month’s Import Price Index confirmed the rebound from its first contraction in over four years in October. At a 2.5 percent annual pace of expansion, the outlook for the more important consumer basket will now be decidedly more hawkish. While this was an important number for rate speculators (as it covers 17 percent of all goods consumed in the United States), its ultimate effect was dampened by a far tamer core figure. Excluding the rebound in the petroleum group and natural gas, a strong monthly inflation number turned into a modest 0.2 percent growth. This allowed the retail sales figure, released at the same time, to dictate fundamental direction for all the US assets. Sales marked grew the most in five months in December as holiday discounts encouraged spending in many of the key sectors of the economy. Purchases of electronics grew 3.0 percent while receipts at filling stations jumped 3.8 percent as gasoline prices regrouped. Even when the volatile components of the report were stripped away, a 0.9 percent increase marked strong consumer spending through the end of the year. The positive implications for both the economy and possibly interest rates were not lost on stocks or treasuries which responded with modest moves.
 
Bonds – US 10-Year Treasury Note

Treasuries quickly responded to the simultaneous economic release Friday morning. Both the retail sales and import price reports offered a strong case for the Board of Governors at the Federal Reserve to push back any inklings of a possible rate cut within the first half of the year. Short-term interest rate futures subsequently are showing favor for a possible firming sometime in the first three months of the year, with a cut not receiving much premium until the final quarter of the year. The same outlook is reflected in Treasuries. From the ten-year note, the extended rebound in inflation from the import group and the biggest jump in retail sales since January (when auto sales are excluded) helped push yields to the highest level since November.

FX – EURUSD

The US dollar lost ground against the Euro for the first day in four, as forex markets seemed relatively unimpressed by the slightly better than expected economic figures. Indeed, looking at the chart below, one could not have guessed that Ex Autos Advance Retail Sales growth printed at double consensus estimates. Analysts cite clear technical support as the sole reason for the EURUSD advance, with the pair’s 100-day simple moving average preventing any immediate tumble. Despite this, Euro bulls were unable to take the EURUSD back above the psychologically significant 1.2950 mark through later trade, with the Greenback regaining ground through the afternoon. Given a well-defined EURUSD downtrend, however, it may only be a matter of time before the pair retests the 100-day SMA, with further support seen at a key Fibonacci retracement level of 1.2825.

Equities – S&P 500 Index Futures

US equities were far more fortunate than the domestic currency, as the broader market rally left indices with their strongest weekly gains in three months. Solid Ex Auto Advance Retail Sales figures rose spirits on the street, even prompting a key market giant to raise forecasts for third quarter GDP growth. Further contributing to gains, stronger-than-expected earnings reports likewise boosted optimism among Wall Street investors. With the S&P 500 index 1.5 percent higher on the week, momentum clearly remains to the upside for the domestic equity markets. With key inflation data due in the coming holiday-shortened week, however, traders may be leery to bid corporate stocks higher until it becomes clear that the Fed will not turn hawkish on monetary policy through the medium term. Otherwise, recently upbeat economic data suggests that earnings season could prove positive for equity markets, with the broader indices to benefit from strong corporate profit reports.