U.S. retail sales rose 0.7 percent month-over-month in August, blowing past the 0.3 percent consensus forecast. Two-year Treasury yields jumped 9 basis points to 5.12 percent within minutes of the release. Fed funds futures now price the probability of a rate cut by year-end at just 18 percent, down from 35 percent a week ago.
Consumers increased spending on motor vehicles and parts, up 1.2 percent, and online retail, up 0.9 percent. The breadth of demand challenges the Federal Reserve's inflation-fighting efforts and amplifies duration risk for bondholders—longer-dated fixed-income assets face pressure if high rates persist.
The strong data likely hardens the Fed's hawkish stance, pushing any rate-cut timeline deeper into 2025. The front end of the yield curve steepened, with the two-year to 10-year spread narrowing 3 basis points, reflecting market pricing for sustained tightening.
