Shares rebound, Treasury yields rise on stronger data

Global equity markets rallied and Treasury yields rose on Tuesday, as solid U.S. retail sales in April suggested economic growth might strengthen, as did an easing of Chinas lockdowns to contain the COVID-19 pandemic.

U.S. retail sales rose 0.9% last month while data for March was revised higher to show sales advancing 1.4% instead of 0.7% as previously reported, the Commerce Department said.

The data show U.S. consumers weathering inflationary headwinds as sales gained for the fourth consecutive month, said Jeffrey Roach, chief economist for LPL Financial. Sales are nominal, so much of the increase is from higher prices, he said.

“We expect a rebound in economic growth in Q2,” Roach said in an email, if prices moderate enough to relieve some of the pressure on consumers.

U.S. and European stocks rallied following gains overnight in Asia. MSCIs gauge of stocks across the globe closed up 2.0%. The pan-European STOXX 600 index rose 1.22%.

On Wall Street, the Dow Jones Industrial Average rose 1.28%, the S&P 500 gained 1.89% and the Nasdaq Composite advanced 2.57%. Growth stocks rose 2.48% while value shares gained 1.60%. [.N/C]

The gains were a rebound from overselling last week, said Anthony Saglimbene, global market strategist at Ameriprise Financial, citing the sixth straight weekly loss for the Nasdaq and S&P 500.

“Theres this battle in the stock market between what breaks first: inflation or the consumer. The stock market is betting that the consumer is going to break and credit markets are betting that inflation is going to break first,” he said.

“The stock market is getting close to overcorrecting and pricing in the probability of a recession that I think is just too high,” Saglimbene said.

Data also showed industrial production rose 1.1% in April, with the manufacturing capacity utilization rate at its highest since 2007. The sector is running too hot and needs to slow for inflation to get under control, said Bill Adams, chief economist for Comerica Bank.

The Federal Reserve will raise the federal funds rate half a percentage point at each of its next two policy meetings to throw some sand in the economys gears, Adams said in an email.

The U.S. central bank will “keep pushing” to tighten U.S. monetary policy until it is clear inflation is declining, Fed chair Jerome Powell said at a Wall Street Journal event.

“What we need to see is inflation coming down in a clear and convincing way,” he said. “If we dont see that, we will have to consider moving more aggressively” to tighten financial conditions.

The Fed is behind the curve and trying to play catch up, said Brian Ward, chief executive of Broadmark Realty Capital Inc.

“We are trying to address a very complex set of facts with a very blunt instrument via monetary policy and I think that its not going to turn out well,” Ward said.

The yield on 10-year Treasury notes rose 10.7 basis points to 2.986%.

The dollar eased for a third straight day, pulling back from a two-decade high against a basket of major peers, as an uptick in risk appetite cut the greenbacks safe-haven appeal.

The dollar index fell 0.787%, with the euro up 1.07% to $1.0543. Japans yen weakened 0.14% to 129.36 per dollar.

Fears remain about the strength of the worlds two largest economies after weak retail and factory figures in China and some disappointing U.S. manufacturing data..

An index compiled by U.S. bank Citi that monitors whether economic data comes in better or worse than economists had been expecting is back in negative territory.

Graphic: Negative surprises – https://fingfx.thomsonreuters.com/gfx/mkt/zjpqkgkqlpx/Pasted%20image%201652779321439.png

Crude oil gave up gains on news Washington may ease restrictions on Venezuelas government, and prices fell further when Powell began to speak on concerns a Fed policy error could slam the economy and reduce energy demand.

U.S. crude futures fell $1.80 to settle at $112.40 a barrel and Brent settled down $2.31 at $111.93 a barrel.

Gold fell as the robust U.S. retail sales data and likelihood of aggressive Fed rate hikes outweighed support from a weaker dollar.

U.S. gold futures settled up 0.3% at $1,818.9.

Hopes that China might ease lockdowns after Shanghai achieved the long-awaited milestone of three straight days with no new COVID-19 cases outside quarantine zones.

Mainland China‘s CSI300 Index gained 1.25% while Hong Kong’s Hang Seng Index rose 3.27%, as tech firms listed in the city jumped nearly 6% on hopes of Beijings crackdown on the sector being relaxed.

(Reporting by Herbert Lash; Additional reporting by Lawrence White in London and Scott Murdoch in Hong Kong; Editing by Lincoln Feast, Kirsten Donovan, Barbara Lewis, Jonathan Oatis and David Gregorio)