Stocks shrug off rates risk as U.S. consumers spend

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SINGAPORE — Bonds fell and the dollar rose on Thursday as roaring U.S. retail sales had investors reckoning on interest rates staying higher for longer to temper demand, though stock markets were focused on the bright side for earnings and climbed a little.

The S&P 500 rose 0.3% overnight. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6% in early trade. Japan’s Nikkei rose 0.6%.

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The greenback stood near six-week highs against the yen, yuan and kiwi. Benchmark 10-year Treasury yields, which rise when bond prices fall, hit their highest since early January.

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U.S. retail sales increased by the most in nearly two years in January – up 3%, against expectations of a 1.8% rise – as Americans bought cars, clothes and furniture despite higher borrowing costs.

The figures came on the heels of stronger-than-expected labor data and with sticker-than-expected inflation.

Equities – with the Nasdaq up 15% so far this year – are clinging to the positives, while in interest rate markets investors are quickly ditching hopes for cuts later in 2023.

“A lot of the data has been quite positive, so people might be thinking: ‘Where’s the recession?’” said Jason Wong, a senior market strategist a BNZ in Wellington.

“It’s positive for earnings and that can offset rates – at least that’s the charitable explanation,” he said. “Either that, or it’s a massive ‘sell’ (signal).”

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U.S. interest rate futures – which only a couple of weeks ago implied the Fed funds rate, currently fixed between 4.5% and 4.75%, would drop below 4.5% by year’s end – now see rates above 5% through the year.

Two-year Treasury yields, which also track short-term interest rate expectations, hit their highest since November at 4.703% overnight. The ten-year yield hit 3.828% on Thursday.

S&P 500 futures rose 0.2%.

DOLLAR ASCENDANT

Around Asia, South Korea’s Kospi led gains with a 1.4% rise. The Hang Seng rose 0.7% and mainland Chinese stocks were flat.

Australia’s ASX 200, where companies are in the midst of earnings reporting, rose 0.9%. Wealth manager AMP led losers with a 34% annual profit drop that sent its struggling shares down 13%. A 26% gain in profit at telco Telstra drove the stock to a one-year high.

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Elsewhere the repricing of the interest rates outlook is putting an end to a couple months of selling of the dollar in currency markets.

The U.S. dollar index is eying a third weekly gain in a row – the longest streak since September, when the index was galloping towards a 20-year high.

The dollar made a six-week high of 134.36 yen on Wednesday and hovered at 133.99 early on Thursday. It is also testing resistance near $1.0656 per euro and was last at $1.0669.

The Australian dollar fell 0.5% and through its 50-day moving average to $0.6868 after a surprise rise in unemployment that also cooled bets on interest rate hikes.

“The Aussie still has some support around the $0.6850/80 area, but with the U.S. dollar in the ascendancy, the Aussie is certainly looking vulnerable,” said Rodrigo Catril, senior currency strategist at National Australia Bank in Sydney.

Commodities have struggled for traction as the dollar has gained. Brent crude futures were up 0.2% to $78.76 on Thursday. Gold was attempting to steady at $1,840 an ounce.

Bitcoin, meanwhile, has been on a tear. It hit a six-month high of $24,895.

(Reporting by Tom Westbrook; Editing by Bradley Perrett)