The Federal Reserve's interest rate cut expectations have cooled significantly! U.S. retail data exceeded expectations, and "re-inflation" is gradually coming into view

According to the Zhitong Finance APP, the U.S. retail sales figures, known for their "terrifying data," indicate that U.S. consumer spending remains resilient. The September retail data was unexpectedly revised upward, and the October retail sales continued to grow month-on-month beyond expectations, primarily due to automobile sales. Other categories of sales also showed an acceleration in consumer momentum as U.S. consumers entered the holiday season. The October U.S. retail sales figures demonstrate that the core supporting the U.S. economy—U.S. consumer spending—remains strong, but they also indicate a rising trend in inflation, prompting a significant cooling of interest rate market expectations for the Federal Reserve's rate cuts in December and 2025 after the retail data was released.

The latest data released by the U.S. Department of Commerce on Friday showed that the unadjusted retail sales figures were revised upward to a month-on-month increase of 0.8% in September, with October data showing a month-on-month increase of 0.4%, both exceeding economists' general expectations. Excluding automobile sales, retail sales slightly increased by 0.1%.

Economists have stated that the continuous unexpected growth in unadjusted retail sales largely reflects "sticky inflation," which compels consumers to spend more money to buy the same items. This not only indicates that resilient consumer spending supports a clearer "soft landing" for the U.S. economy but also reflects a certain degree of "re-inflation" trends, as it does not exclude the impact of inflation.

In the U.S. Treasury market, traders have begun to price in "re-inflation" expectations. They anticipate that as inflation remains sticky and a series of policies under President Donald Trump—including tax cuts, immigration crackdowns, and increased tariffs—may push "re-inflation" into reality. The yield on 10-year U.S. Treasuries could even approach 5%, which would affect the volatility of risk assets such as stocks.

It is understood that among the 13 categories in the retail report, 8 categories experienced growth, with the most significant increase in retail sales occurring in electronics and appliance stores. Automobile sales saw the largest increase in three months. The growth rate of sales in the e-commerce sector was moderate, possibly reflecting discount activities during Amazon Prime membership periods and similar large-scale promotional activities by retail giants like Walmart and Target.

The good news is that the U.S. economy is highly resilient, while the bad news is that "re-inflation" seems to be getting closer.

The upwardly revised September retail sales data indicates that even with rising inflation, U.S. consumers are showing considerable resilience in their spending during the last months of the year, which may suggest a very robust consumer performance for this year's U.S. holiday shopping season.

However, the unsettling news is that inflation rates, especially core inflation excluding energy and food prices, remain high. Some large retailers have already begun to consider more significant price increases, as they anticipate that under President Donald Trump's leadership, tariffs on imported goods will rise, leading to a sharp reduction in the number of goods available in the market, and thus prices are expected to continue to rise Data shows that the so-called control group sales—measured as government spending on U.S. goods included in the Gross Domestic Product (GDP)—unexpectedly fell by 0.1% in October, marking a significant decline after the largest increase since the beginning of 2023. This indicator excludes food services, auto dealers, building material stores, and gas stations.

However, over the past three months, retail sales in the control group, when annualized, unexpectedly grew by 4.6% year-on-year, indicating that the U.S. economy is off to a good start at the end of the year, building on strong growth in the third quarter. However, core inflation may show a persistent upward trend, which could continue to suppress expectations for interest rate cuts by the Federal Reserve.

Combined with the upward trend in inflation data released earlier this week, these figures may lead Federal Reserve officials to remain cautious about further rate cuts. Federal Reserve Chairman Jerome Powell stated at an event on Thursday that the recent performance of the U.S. economy has been "very good," allowing policymakers to potentially proceed with rate cuts at a more cautious pace.

Following the data release, the yield on 10-year U.S. Treasury bonds rose sharply, while futures for the three major U.S. stock indices continued to weaken.

Some economists have noted that while retail data is strong, the outlook for retailers remains challenging, as consumers are still facing rising prices after years of high costs, although the increases are not as severe as in 2022. Furthermore, current forecasts suggest that middle- and low-income consumer groups may be more restrained during this year's holiday shopping season compared to last year. Additionally, the calendar effect of fewer shopping days between Thanksgiving and Christmas this year is expected to negatively impact sales.

Economists will closely monitor sales on "Black Friday" and "Cyber Monday" to gauge consumer interest in the U.S. holiday shopping frenzy. Next week, earnings reports from Walmart and Target will also help guide market expectations regarding U.S. consumption and inflation.

Before the release of October retail sales, the overall Consumer Price Index (CPI) in the U.S. rose by 0.24% month-on-month in October (expected 0.20%), while core CPI recorded 0.28% (expected 0.30%), generally in line with expectations. The overall CPI has remained at the 0.2% level for four consecutive months, and core CPI has remained at the 0.3% level for three consecutive months. Structurally, the rebound in housing inflation and the relative stability of other core service items indicate that the upward momentum of inflation is still ongoing, which are significant signs of "re-inflation," with the risks of inflation rising far outweighing the risks of it declining. More importantly, Trump's "MAGA policy expectations" will further catalyze expectations for rising inflation.

Expectations for Federal Reserve rate cuts have significantly cooled, with some traders even betting on a pause in rate cuts in December.

Federal Reserve Governor Adriana Kugler stated that policymakers must pay attention to both the central bank's inflation and employment targets, noting that the labor market is cooling, and progress toward the Federal Reserve's 2% inflation target is slowing. Kugler said on Thursday, "The trends of disinflation and cooling in the labor market are ongoing but have slowed, which means we need to continue to focus on both aspects of our mission." Since 2023, Minneapolis Federal Reserve President Neel Kashkari, who has taken a hawkish stance, recently warned in an interview that if inflation unexpectedly rises before December, it could lead the Federal Reserve to pause interest rate cuts.

2025 FOMC voting member and St. Louis Federal Reserve President James Bullard recently stated, "Recent information suggests that the risk of inflation stagnating on a downward trajectory or even rising has increased. Data shows that the economy is 'stronger than before, and possibly much stronger than before,' and several core inflation indicators have 'slightly increased.'"

Federal Reserve Chair Jerome Powell stated on Thursday that the strong growth of the U.S. economy allows decision-makers to be deliberate in determining the pace and magnitude of interest rate cuts. Speaking to business leaders in Dallas, Powell said, "The economy has not signaled any urgency for us to cut rates. The current strong performance of the economy allows us to make decisions more cautiously." "Inflation levels are closer to our long-term target of 2%, but have not yet reached it. We are committed to achieving this goal," Powell said. He also mentioned that the process of achieving this goal may "occasionally encounter some bumps."

This week's CPI and PPI data both indicate that U.S. inflation remains sticky and is showing signs of heating up, prompting interest rate futures traders to significantly temper their expectations for the Federal Reserve's rate cuts in December and next year. The "CME FedWatch Tool" shows that following the release of rising CPI, PPI, and strong retail sales data, the probability of the Federal Reserve pausing rate cuts in December rose from less than 30% to nearly 40%, and it is now expected that the Fed may only cut rates twice next year, rather than the four cuts indicated before this week's inflation and retail data were released.

David Kelly, Global Chief Strategist at JPMorgan Asset Management, warned earlier this week that if Trump wins the U.S. election, the Federal Reserve could even pause its rate-cutting cycle as early as December. Following Trump's announcement of winning the presidential election, an economist team from Nomura now expects the Federal Reserve to cut rates only once in 2025, down from their previous expectation of four cuts in 2025