Bonds Climb As Weak Retail Sales Bolster Fed Bets: Markets Wrap

The world’s biggest bond market rallied as a weak reading on retail sales prompted a slight increase in bets on Federal Reserve rate cuts.

Treasuries rose across the curve, with the 10-year yield dropping below 4.5%. Money markets are now pricing in around 40 basis points of Fed cuts in 2025. Equities wavered after the S&P 500 came close to its all-time highs. The dollar fell. Applied Materials Inc. sank on a lukewarm forecast. Intel Corp. headed toward its best week since at least 1982.

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. Excluding autos, sales dropped 0.4%.

“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.”

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.”

The S&P 500 was little changed. The Nasdaq 100 wavered. The Dow Jones Industrial Average fluctuated. US markets will be closed Monday for Presidents’ Day.

The yield on 10-year Treasuries declined six basis points to 4.47%. The Bloomberg Dollar Spot Index fell 0.4%.

Separate data showed US industrial production rose in January by more than forecast, boosted by utilities in a month marked by colder temperatures, while manufacturing eased.

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.

Asian equities were headed for gains on Friday as markets reacted positively to signs reciprocal US tariffs may be weeks from coming into effect, raising the prospect for negotiations that could make them less punitive.

Shares in Australia and South Korea rose, while those in Japan and China fluctuated. US equity index futures were little changed after the S&P 500 neared a new high Thursday, helping lift a measure of global shares to a record closing high. The yen and South Korean won advanced.

Support for equities suggests investors have focused on chances that negotiations could blunt the impact of the tariffs, echoing the response to delays on those leveled at Canada and Mexico earlier this month. The work required to propose reciprocal tariffs will occur on a country-by-country basis and could take until April to complete, Howard Lutnick, Trump’s nominee to lead the Commerce Department, told reporters, offering a window for negotiations.

The comments followed news that Trump had ordered his administration to consider reciprocal tariffs on numerous trading partners, singling out Japan and South Korea as nations that he believes are taking advantage of the US. The two Asian countries’ currencies were stronger against the dollar on Friday, compounding Thursday advances. An index of the dollar was little changed after its biggest drop in three weeks in the prior session.

“The fact this is a slow burn approach from Trump, with the chance many of the tariffs will be extinguished, is supporting market sentiment,” said Kyle Rodda, senior market analyst at Capital.com.

The work required to propose reciprocal tariffs will occur on a country-by-country basis and could take until April to complete, said Howard Lutnick, Trump’s nominee to lead the Commerce Department. The comments followed news that Trump had ordered his administration to consider reciprocal tariffs on numerous trading partners. 

“The fact that Trump didn’t explicitly target Europe yesterday and left an April deadline to negotiate with him brings some relief,” said Karen Georges, a fund manager at Ecofi in Paris.

An index of the dollar slipped Friday after its biggest drop in three weeks in the previous session. In currencies, the yen rose, while the pound hit its highest level against the dollar this year. Treasuries steadied after Thursday’s rally. 

Gold traded near a record high. The precious metal has gained this year, powered by haven demand, setting successive records with potential to line up a test of $3,000 an ounce.