The bond market experienced a strong week, buoyed by disappointing retail sales figures that reignited expectations for Federal Reserve interest rate cuts. A surge in demand for Treasuries pushed the 10-year yield below 4.5%, marking its fifth consecutive week of gains—a streak unseen since 2021.
Money markets now fully anticipate a Fed rate reduction by September. Meanwhile, the S&P 500 remained near record highs, and the US dollar weakened to a new low for 2025.
Retail Sales Slump Raises Fed Cut Expectations
January’s US retail sales data revealed the sharpest decline in nearly two years, signalling a significant pullback in consumer spending following a holiday season surge. Retail purchases, unadjusted for inflation, fell 0.9% following a revised 0.7% increase in December.
Analysts at TradeStation and Interactive Brokers suggested that the weak retail sales data, coupled with earlier consumer sentiment reports, strengthens the case for Fed rate cuts. The data potentially offsets concerns about “piping hot” inflation figures reported earlier in the week.
Stock Market Performance: Mixed Results
The major indexes closed mixed:
- S&P 500: Flat
- Nasdaq 100: +0.4% gain, continuing its strong run
- Dow Jones: -0.4% decline
Key Stock Movers
- Meta Platforms Inc. extended its rally to 20 consecutive sessions of gains.
- Dell Technologies Inc. surged on reports of a $5 billion server deal with Elon Musk’s xAI.
- Intel Corp. had its best weekly performance since 2000, despite a decline on Friday.
The 10-year Treasury yield fell five basis points to 4.48%, and the Bloomberg Dollar Spot Index dropped 0.3%.
Weekly Market Performance
For the week:
- S&P 500: +1.5%
- Nasdaq Composite: +2.6%
- Dow Jones: -0.4%
Friday’s Closing Levels
| Index | Close | Change | % Change |
|---|---|---|---|
| DOW JONES | 44,546.08 | -165.35 | -0.37% |
| S&P 500 | 6,114.63 | -0.44 | -0.01% |
| NASDAQ | 20,026.77 | +81.13 | +0.41% |
| US 10Y | 4.476% | ||
| VIX | 14.77 | -0.33 | -2.19% |
What Analysts Are Saying
- Morgan Stanley Wealth Management: Consumers remain confident despite policy uncertainty.
- Wells Fargo Investment Institute: Slowing economic activity isn’t enough to offset firming inflation.
- eToro: Cautioned against overinterpreting a single data point but noted weaker retail sales alongside high inflation as a challenge.
- FHN Financial: Skeptical that this report signals a turning point in consumer spending, warning that bonds may now be overbought.
Analyst Insights: Market Caught Between Growth and Inflation Risks
Diverging Views on the Fed’s Next Move
- Interactive Brokers analysts highlighted two possible scenarios:
- Rates ease while economic growth remains moderate.
- A sharper-than-expected slowdown in consumer and government spending.
- Bank of America Corp believes that faster inflation might lead to smaller trade tariffs. They recommended buying bonds, predicting that the 30-year Treasury yield likely peaked near 5% in January.
How Inflation and Yields Are Shaping the Market
- Miller Tabak noted the correlation between declining bond yields and the stock market strength. They attributed the rally more to inflation concerns than geopolitical events and pointed out the stock market’s range-bound behaviour, suggesting potential for a positive breakout.
- Goldman Sachs Group Inc.’s analysis revealed that micro factors are now driving the market more than macro trends. Their outlook for 2025 suggests that healthy economic growth, AI development, and policy uncertainty will create opportunities for active managers.
Market Outlook: What’s Next?
The stock market remains in a confused, back-and-forth state, with traders struggling to find a clear trend.
- Dips are immediately met with buying, signaling strong bullish sentiment.
- Despite concerns, markets continue pushing toward new highs.
- A breakout could trigger another round of buying.
- While economic data and inflation concerns remain key risks, the resilient stock market suggests investors are still willing to bet on further gains.
Looking Ahead: Key Events Next Week
- US markets will be closed on Monday for Presidents’ Day.
- January’s consumer price index (CPI) report will provide fresh inflation insights.
- Retail sales trends will be closely watched to gauge consumer spending strength.
Source: CBOE, Bloomberg
This commentary was written by James Gomes, a seasoned finance professional with over 30 years of industry experience, including a tenure exceeding 20 years at a prominent US bank.
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