US Market Outlook: Retail Sales, Big Retail Earnings, and Political Jitters Set the Stage

Back to US: retail sales, Big Retail earnings & US political jitters  

Yesterday's rush to open fresh long US Treasury positions was likely intensified by a hurry to cover short positions. We shall see a correction in the US yields, as the Fed members still maintain their position for 'higher for longer' interest rates. But the market position is clear. The pricing now suggests a 50bp cut from the Fed by July next year; the sweet and sour cocktail of softening jobs market and easing inflation suggests that the Fed's next move will probably be a rate cut, rather than a rate hike.  

So yes, ladies and gentlemen, the way is being paved for a potential Santa rally this year. But the Fed will continue to calm down the game, and any strength in the US economic data should reinforce the 'high for long' rhetoric and tame appetite. 

Investors will watch the US retail sales data today. A strong figure could pour cold water on heated Fed cut bets. A soft figure, on the other hand, could bring in more buyers to US bond markets.  

On the individual front, Home Depot shares rallied more than 5% yesterday. Earnings and revenue narrowed and the company released a cautious year-end guidance, but the results were better than expected. Target is due to report today, and Walmart on Thursday. 

To add another layer of complexity – on top of the economic data and corporate earnings – the US political scene will impact bond pricing in the next few days. The US politicians try to avoid a government shutdown by Friday. The latest news suggests that the odds of shutdown diminished yesterday as House Speaker Mike Johnson gained more Democratic support for his interim funding plan. The interim plan however excludes aid for Ukraine, aid for Israel and could lead to a two-step shutdown at the start of next year. And it does not include the steep spending cuts that the hardcore Republicans are looking for. In summary, the political mess continues.  

In the best-case scenario, the US politicians will agree on another short-term relief package and avoid a government shutdown, push away the threat of another rating cut – from Moody's this time. The latter would maintain appetite in US bonds and support a further rally in the US stocks. In the worst-case scenario, the US government will stop its operations by the end of this week and the political chaos will lead to a bounce in US yields and stall the equity rally.