Fed Rate-Hike Odds Drop As Retail Sales Fall; S&P 500 Slides

The Fed has more reason not to hike its key interest rate next week, if the sudden banking crisis weren’t enough. Retail sales slipped a bit more than forecast and the producer price index unexpectedly fell in February. The reports casts some doubt on the notion that the economy and inflation have a full head of steam early in 2023. After the reports, the S&P 500 opened sharply lower as bank stocks remained under pressure.

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Retail Sales Report Details

Overall retail sales fell 0.4% vs. expectations of a 0.3% decline. Excluding vehicles, sales dipped 0.1%, undershooting estimates of a 0.2% rise.

January sales surged 3.2% overall, revised up from the 3% reported last month. Excluding autos, January sales rose 2.4%, revised up from 2.3%.

Factoring out sales at gas stations, which fell 0.6%, as well as autos, retail sales were flat in February.

An 8.7% cost-of-living boost to Social Security checks likely helped fuel January’s outsized gain. Meanwhile, February sales faced greater headwinds as 30 million households lose an extra $95 per month in pandemic-era Supplemental Nutrition Assistance Program benefits.

Meanwhile, the producer price index fell 0.1% in February, as the annual inflation rate for wholesale prices eased to 4.6% from a downwardly revised 5.4% in January.

Also, the New York Fed’s Empire State manufacturing index tumbled to -24.6 in March from February’s -5.8. That’s vs. views for -7.7.

S&P 500 Reaction To Retail Sales

After the retail sales report and other data, the S&P 500 slid 1.5% in Wednesday morning stock market action. Big U.S.-based banks took a hit overnight amid a selloff in European bank stocks that saw Credit Suisse (CS) hit an all-time low.

The S&P 500 rallied 1.65% on Tuesday, snapping a three-session losing streak sparked by the overnight collapse of SVB Financial Group..

As of Tuesday’s close, the S&P 500 remained 9.6% above its bear-market closing low on Oct. 12, but 18.3% below its all-time high at the start of 2022.

The 10-year Treasury yield, after jumping 12 basis points on Tuesday, fell 18 basis points to 3.46% early Wednesday.

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Fed Rate-Hike Odds Fall

After the retail sales and PPI reports, markets were pricing in 47% odds of no Fed rate hike on March 22, and 53% odds of a quarter-point move. On Tuesday, markets saw 30% odds that the Fed will stand pat.

Markets are now betting on a pause in May, with several Fed rate cuts in following meetings.

The sudden banking crisis, which led to the weekend bailout of all SVB and Signature Bank depositors — even those whose deposits weren’t guaranteed — has upended the Fed’s plan to keep on hiking its key interest rate. Previously, Fed officials said that the costs of hiking too little easily outweighed the costs of hiking too much. But with the sudden evidence of banking-sector fragility, the risks are now at least balanced or probably even tilted the other way.

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