Wall Street began Tuesday’s session on a weaker note, with major indices slipping after November's robust retail sales report reignited investor concerns that the Federal Reserve might hold back interest rate cuts next year.
The data, which underscored resilient consumer spending heading into the holiday season, added a fresh layer of uncertainty to the Fed's future rate path ahead of Wednesday’s highly awaited December Federal Open Market Committee meeting.
Retail sales surged 0.7% last month, outperforming consensus estimates of a 0.5% increase and marking a notable acceleration from October's upwardly revised 0.5% gain.
On an annual basis, sales climbed 3.8%, hitting their fastest pace since December 2023. A significant portion of the strength came from auto sales, which soared 2.6% on a monthly basis and by a robust 6.5% year-over-year, highlighting consumers' willingness to make big-ticket purchases in the fourth quarter of the year.
Spending was also robust in other categories. Nonstore retailers, driven by e-commerce activity, posted a 1.8% monthly gain, reflecting the growing dominance of online shopping as the holiday season commenced. Sporting goods, hobby, and book stores registered a 0.9% uptick, showing steady demand for discretionary items.
Market Reaction: Pressure Builds On Equities
The stronger-than-expected data put equity markets under pressure, as investors recalibrated their expectations for the Fed's next moves.
Semiconductor stocks led the downturn amid renewed geopolitical tensions after reports surfaced that China is broadening antitrust scrutiny on U.S. chipmakers’ acquisitions in recent years. Last week, Beijing opened an investigation on U.S. chip giant Nvidia Corp.‘s (NASDAQ:NVDA) 2019 acquisition of Mellanox Technologies.
Investors Face Fed Uncertainty
While a 25-basis-point reduction at the Fed's policy meeting this week is widely anticipated, the central bank's outlook for 2025 remains in question.
Fed fund futures now suggest an 80% chance the Fed will hold rates steady at its January meeting, while expectations for a March rate cut have softened, with odds slipping to 58% from 60% a day earlier.
Betting-implied odds from CFTC-regulated Kalshi continue to suggest an elevated 92% probability of four cuts next year, yet financial markets now imply only three rate cuts.
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