Retail sales, bond auctions and ambivalent connections

Yesterday US retail sales data was released. An economy which is built 70% on consumption, such data can be a harbinger of public mood and provide a good clue on the state of the economy. The retail sales data for the month of October showed a 1.7% mom increase and 16.3% YOY?increase. The reading was better than expected as the market was expecting a 1.5% mom jump. One important point to note is that the sales number are not adjusted for price changes and hence a high inflation set up will add its might to the number. Also one needs to be aware of how this data is calculated, it is not a complete census of the sale of all retail shops but a sample survey where sales of 5500 retail and food services establishments are weighted and benchmarked to represent the complete universe of over 3 million?such firms across the US. We have previously written that sample data are prone to sampling errors like non representativeness of selected firms. But markets hardly have time to care for such nuances, a better than expected reading point to a resurging economy which should be then weaned off from the stimulus medicine. This should then be reflected in rates, yields should go up and fed fund futures pricing should have a rethink. The 10 year UST is trading currently at 1.63, Fed funds futures are predicting a first hike in July 2022 but there is more confidence appearing around the second hike in November. The policy normalization is on its way.

Any promise to raise the policy rates should be a dollar positive which is reflected in the dollar index which is now within kissing distance of 95, a level last seen in July 2021. The effect of policy normalization on account of a recovering economy and high inflation on the stock markets is a bit ambivalent. A rise in sales adds to the bottom line but a rise in rates increases the funding cost and discounts the future earning at a higher rate impacting the pv. Dow Jones still remains at ATH levels and the tech stocks continue to make hay while the sun signs. The bet on tech happens to be a bet on a future where few tech giants will emerge as monopolies (if they are not one yet) commanding insane pricing power. The premium is not for cash flows but for that convergence of power at an indeterminate time in future.?

The baseline bet so far is that liquidity is abundant and will only increase till the taper is not concluded. 1.46 trillion USD of liquidity continues to get parked at the overnight reverse repo window at Fed. This is one strand which would be released in the system at some point of time in future. Markets will tune up today for the Treasury auctions for 23 Billion USD 20 year bonds, the yields go up in case the demand is tepid. The news about the infra support package championed by the Biden administration that it is not going to be fully paid for (meaning the future tax collections won't be able to pay for the bill) is not helping the bond market and only way for yields appear to be up. The emerging market currencies should brace up for some volatility in coming days as the reversal of flows might impact them negatively. The emerging market currencies performance is a collateral show and the investors should brace up for some volatility in case the US bond yields move up quickly.