Stocks joined losses in risk assets as bond yields climbed on speculation the Federal Reserve will be in no rush to cut interest rates as the economy shows signs of resilience.

At a time when good economic news is not really that great from a policy perspective, a solid reading on retail sales fueled concern about Wall Street’s bold dovish bid. And with central bank officials recently striking a more cautious tone about prospects for easing, it ended up being the perfect recipe for traders to push back the timing for the first Fed move — assigning lower odds of a rate reduction in the first quarter.

“We will need to see data that is consistent with a still healthy and resilient consumer, but not to the point where the Fed would be inclined to delay rate cuts or cut less in 2024,” said Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter.

Strong consumer spending helped propel the economy in recent weeks, the Fed said in its Beige Book survey. Fed swaps now show the probability of easing as soon as March dropping to around 50 per cent — compared with 80 per cent on Friday. The move also reflected a slide in UK bonds after data showed inflation picked up — making traders pare their bets on Bank of England easing.

Treasury two-year yields topped 4.3 per cent. The dollar rose. The S&P 500 extended its 2024 losses. Wall Street’s “fear gauge” — the VIX — hit the highest since November.

U.S. retail sales rose at the strongest pace in three months in December, capping a solid holiday season that suggests consumer resilience heading into the new year. Separate data showed homebuilder sentiment climbed January by the most in nearly a year as lower mortgage rates boosted customer traffic, sales and the demand outlook.

To Andrew Hunter at Capital Economics, while a further slowdown possibly lies ahead, there is still little to suggest a sharper downturn is in store.

“A recession seems increasingly unlikely,” said David Russell at TradeStation. “Despite weathering an inflationary storm, consumers still have pent up demand and dollars to spend. A soft landing could be taking shape before our eyes.”

With consumer confidence gaining momentum, the economic landscape remains on solid ground — and the market reaction suggests hopes for a March rate cut becomes more elusive, according to Quincy Krosby at LPL Financial. 

In fact, there’s a repeated refrain from the throngs of financiers in Davos this week: rein in your rate-cut expectations.

Everyone from JPMorgan Chase & Co.’s Daniel Pinto to Standard Chartered Plc’s Bill Winters to Cantor Fitzgerald’s Howard Lutnick have said they expect monetary policy to ease slower than anticipated by the market.

Still, traders continue to expect the Fed this year to embark on a reversal of the aggressive tightening campaign that lifted the cap on the federal funds rate to 5.5 per cent in July 2023 from 0.25 per cent at the start of 2022. But they look for the cuts to total about 140 basis points, down from a recent peak near 175 basis points.

Jason Draho at UBS Global Wealth Management says that it’s unlikely to be a smooth path for markets.

“Investors will be debating the type of soft landing, stage of the cycle, and the macro regime, and the wide dispersion of views now could quickly evolve based on new data,” Draho said. “That could lead to quick and dramatic market pivots to price in shifting consensus views.”

And as the earnings season continues, investors will need to consider their rate outlook alongside financial results, according to Jose Torres at Interactive Brokers.

“Robust pricing power and profitability are likely to lead to persistent inflationary pressures, which will incrementally delay rate cuts,” Torres said. “Weaker earnings trends, on the other hand, may lay the groundwork for monetary policy easing, but at the cost of deteriorating corporate fundamentals.”

Corporate Highlights:

• Operators of Boeing Co.’s 737 Max 9 have completed inspections on an initial batch of 40 planes, a key step to eventually end the grounding of the aircraft ordered by U.S. regulators in the wake of an accident earlier this month.
• Digital World Acquisition Corp., the blank-check firm seeking to take Donald Trump’s media company public, soared on optimism over his status as the Republican frontrunner for the party’s 2024 nomination and a financing update for the deal.
• Apple Inc. is poised to face a U.S. antitrust lawsuit as soon as March as the Justice Department prepares to take on one of the world’s most valuable companies, according to people familiar with the case.
• Bayer AG said it has agreed with employee groups on a plan to cut a “significant” number of jobs as the company looks to streamline operations and improve its performance.
• Samsung Electronics Co. is turning to artificial intelligence features to revamp its flagship Galaxy smartphones, betting that the technology can give it an advantage over Apple Inc.’s iPhone.
• Verizon Communications Inc. is writing down the value of its business services division by US5.8 billion, a sign of the company’s declining enterprise operations.
• Charles Schwab Corp. reported declines in profit, new assets and deposits as it navigated a tumultuous year of interest rate hikes that dented the firm’s balance sheet.
• Morgan Stanley was downgraded to neutral from overweight at JPMorgan Chase & Co. Analysts said the U.S. bank is now fairly valued, with limited near-term catalysts to propel its shares higher.
• U.S. Bancorp reported earnings that beat analysts’ estimates as the bank benefits from elevated interest rates.
• PayPal Holdings Inc. completed too many acquisitions over the past few years and will now prioritize profitable growth, including at its Venmo business, Chief Executive Officer Alex Chriss said.

Key events this week:

• U.S. housing starts, initial jobless claims, Thursday
• Republican presidential primary debate in New Hampshire, Thursday
• ECB President Christine Lagarde participates in Davos panel discussion, Thursday
• ECB publishes account of December policy meeting, Thursday
• Atlanta Fed President Raphael Bostic speaks, Thursday
• Canada retail sales, Friday
• Japan CPI, tertiary index, Friday
• U.S. existing home sales, University of Michigan consumer sentiment, Friday
• ECB President Christine Lagarde and IMF Managing Director Kristalina Georgieva speak in Davos, Friday
• San Francisco Fed President Mary Daly speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.6 per cent
• The Dow Jones Industrial Average fell 0.3 per cent
• The MSCI World index fell 0.9 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.1 per cent
• The euro was little changed at $1.0882
• The British pound rose 0.4 per cent to $1.2685
• The Japanese yen fell 0.7 per cent to 148.19 per dollar

Cryptocurrencies

• Bitcoin fell 1.9 per cent to $42,614.01
• Ether fell 2.8 per cent to $2,534.5

Bonds

• The yield on 10-year Treasuries advanced four basis points to 4.10 per cent
• Germany’s 10-year yield advanced six basis points to 2.32 per cent
• Britain’s 10-year yield advanced 19 basis points to 3.98 per cent

Commodities

• West Texas Intermediate crude rose 0.6 per cent to $72.80 a barrel
• Spot gold fell 1.1 per cent to $2,006.04 an ounce

This story was produced with the assistance of Bloomberg Automation.