Retail Sales and GDP Estimates
Excluding autos and gas, sales climbed 0.7% compared to a previous 0.3% after revision. Categories such as clothing, sporting goods, and motor vehicle dealers saw gains, although some increases might reflect higher import costs.
Retail sales are expected to support GDP estimates, with the Atlanta Fed GDPNow tracker for Q3 rising to 3.4%. The upcoming FOMC decision may not change due to this data, but it might influence discussions, especially regarding potential rate cuts.
Industrial production in August edged up 0.1%, with manufacturing output rising by 0.2%. The NAHB housing market index remained at 32 for September, showing consistent sales conditions but a decline in buyer traffic.
U.S. stocks opened higher, driven by Oracle’s potential involvement in a TikTok deal, but closed modestly lower. Indices like the Dow and S&P saw small declines, mirrored by European shares, which experienced larger drops.
Currency and Bond Market Trends
The U.S. dollar faced pressure, with key currency pairs experiencing shifts. Treasury yields descended, led by a 2-year yield drop to 3.509%.
Today’s retail sales report throws a wrench into the Fed’s plans. Consumer spending is running much hotter than expected, which complicates the case for an aggressive rate cut tomorrow. With core PCE inflation having hovered stubbornly around 2.8% for most of 2025, this strong demand could make the Fed hesitant to signal too much easing.
We see the bond market clearly pricing in a dovish Fed, with the 2-year yield dropping more than the 10-year. This suggests derivative traders should focus on strategies that benefit from a dovish surprise, such as buying SOFR futures or call options on Treasury futures. A long straddle on 2-year note futures could be a smart play to capture volatility from either a hawkish hold or a larger-than-expected 50 basis point cut.
