Retail Sales Defiance Might Mean Something

One disclaimer is in order before anything else: Retail Sales data is not a consistent top tier market mover--especially in the past few years.  Sometimes it has a big impact when it doesn't seem like it should and sometimes it has no impact after a big beat/miss.  File today under the latter.  In fact, file today under "paradoxical reaction."  Sales hit 0.7% vs a median forecast of 0.4%.  For a bond market worried about a "no landing" scenario, this should be an obvious nail in the coffin.  So why are rates lower since the data came out?

One may be tempted to look at surrounding data for an explanation.  Other reports were out at 8:30am ET.  These included Import/Export Prices and NY Fed Manufacturing.  We can throw out the other price data immediately because both sides of the coin showed higher prices (i.e. not bond friendly).

NY Fed, on the other hand, is tempting.  It came in at -19 vs -1 f'cast.  Internals were softer as well.  Could this explain the quick reversal after the initial selling?

Probably not.  NY Fed's survey is not a reliable market mover--certainly not on par with Retail Sales.  Moreover, it is notoriously volatile.  The -19 reading may seem big, but it's been lower on multiple recent occasions.  It is also notoriously hard for economists to predict (so we're not reading much into the "miss").

Perhaps the best thing to consider is that 10yr yields are near 4.2%!  That's really high.  And they briefly crested 4.25% after Retail Sales.  I don't know about you, but 10 years of guaranteed returns at 4.25% sounds a whole lot better than the prospect of owning government bonds at any other time in the past decade.  Recall that yesterday's analysis focused on the notion that the selling trend in bonds would increasingly result in organic buying demand among investors "buying the dip" in bond prices.  Maybe that explains some of the resilience.

Even from a technical standpoint, a case can be made via various momentum metrics diverging from the price action.  This is a common technical signal (i.e. bearish/bullish divergences) and not a completely worthless one, unlike many technical signals, even though they're fairly broad and big-picture.  They occur when peaks/valleys in momentum metrics are trending in one direction while peaks/valleys in the underlying security are trending in a different direction.  At the moment, yields may be making higher highs over the past few months, but momentum is actually cooling off.

Please don't use the chart above as something predictive.  It is merely offered as an explanation for willingness of bond buyers to come out of their shell a bit at these higher yields.  Sustained momentum continues to depend on a sustained shift in the data and Fed's interpretation of the data.