Stocks opened higher this morning before rebounding sharply lower off the intraday highs. The Dow, S&P, and Nasdaq Composite all fell in response to a mixed bag of market data.
The biggest news of the day was the March retail sales report, which showed a far worse-than-expected decline in the headline sales figure. Retail sales fell 1.0% month-over-month (MoM) in the US last month vs -0.4% expected.
Core retail sales – excluding gas and autos – fell just 0.3% MoM vs. -0.6% expected, beating estimates easily. This offered traders a mix of hawkish/dovish data that initially confounded stocks.
“Retail sales came in weaker than expected, but a lot of the miss had to do with lower gas prices, which all things being equal is a slight positive for spending,” explained Independent Advisor Alliance CIO Chris Zaccarelli.
“Inflation has been coming down as gas prices have been coming down, but that can reverse in an instant, which would drive the headline numbers higher. What is more concerning is that core (which excludes food and gas prices) has been stubbornly high – and where we believe the risks to higher-rates-for-longer lie.”
And though it took stocks about 30 minutes to read the data as bearish, Treasurys had more immediate clarity on the situation as evidenced by a strong rise in yields that started as soon as trading opened. Treasury markets are now pricing in an 81.5% chance of a 25 basis point rate hike in May according to the CME Group’s FedWatch tool.
Was it the core retail sales “beat” that prompted such a response? Probably. Big bank earnings likely had something to do with it, too.
JPMorgan Chase and Wells Fargo both reported significant “beats” plus optimistic forward guidance, setting a positive tone for banks following the Silicon Valley Bank meltdown last month.
“The US economy continues to be on generally healthy footings — consumers are still spending and have strong balance sheets, and businesses are in good shape,” said JPMorgan Chase CEO Jamie Dimon.
“However, the storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks.”
Dimon bluntly added that lending could recede in anticipation of an economic slowdown, but made no mention of an imminent downturn. Traders may have interpreted bank strength as a hawkish signal, as it could give the Fed an “all clear” to raise rates following the banking crisis.
What also stoked hawkish fears today was the University of Michigan consumer sentiment survey. Sentiment, current conditions, and inflation expectations all spiked higher, beating estimates.
“These expectations have been seesawing for four consecutive months, alternating between increases and decreases,” said survey director Joanne Hsu.
“Uncertainty over short-run inflation expectations continues to be notably elevated, indicating that the recent volatility in expected year-ahead inflation is likely to continue.”
This provided the hawkish “cherry on top” of an already hawkish deluge of headlines. That could mean trouble with the S&P now stalling near the early February highs. Stocks could still go higher, of course.
But with Treasurys now down over the last few sessions (and yields rising), the major market indexes should soon follow, led by rate-sensitive tech names that screamed higher into overbought territory in March.
