No Love For Bonds Despite Weaker Retail Sales

Perhaps there's some recency bias in play, but we're hard pressed to remember a big, obvious bond market sell-off in response to a big miss in Retail Sales.  To be fair, this morning's weakness isn't necessarily BIG, but it was certainly obvious, and clearly connected to the Retail Sales data release.  The catch is that Retail Sales came in at -1.0% versus expectations of -0.4%.  99 out of 100 imaginary traders would expect bonds to rally on those numbers if those numbers were the only data point to trade.  Thus begins our search for "other numbers."

If we limit our search to other data from the same report, the best candidate is the control group which excludes cars, fuel, food, and building materials.  It came in at -0.3, which was perfectly in line with expectations. From there, we can also consider that January was the strongest month of Retail Sales in exactly one year.  Last year, February dropped into negative territory whereas it was +0.5% this year.  Point being, in the context of the past 3 months, today's drop averages out to a quarterly level of growth that is very close to as high as it's been since early 2021.

Also keep in mind that the post-pandemic period caused immense volatility in this data.  If we remove the annoying blue line and just focus on the smoother 3-month average, we see that--apart from the 2 years of post-pandemic volatility--core retail sales are higher than at any other time since 2003.

For a bond trader hoping to see decisive confirmation of a shift in consumer behavior, this data just wasn't weak enough.  At the very least, traders concluded it certainly wasn't weak enough to argue against another rate hike from the Fed in the upcoming meeting.

Now for the counterpoint: I don't really like all of the above as an explanation for this morning's bond market weakness.  It feels forced and like something I would never write, think, or point out if the sell-off hadn't forced me to try to account for it.  

How about bank earnings?  It's been a decent day on that front and there were conference call headlines hitting the wires around the same time as Retail Sales.  I still don't love that explanation.  In fact, I think it's terrible. There's only been one big winner among S&P banks (JPM) in terms of stock price reactions and there wasn't anything big or interesting happening in JPM futures at 8:30am ET.

We're left with a bit of a mystery move and resigned to the "Retail Sales weren't weak enough" explanation unless something better comes to light.