Market Commentary Weak US retail spending sends markets down

• US stocks fell after fresh data showed Americans slowed their spending last month. Technology stocks were the hardest hit, which could reflect that investors were concerned about higher bond yields. The Dow Jones Industrial Average dropped 0.3%, while the S&P 500 lost 0.2% and the Nasdaq Composite slid 0.7%. The latter two set record closes on Monday.

• Recent data from the Commerce Department showed that retail spending fell 1.3% in May. Supply-chain disruptions and business re-openings are triggering a consumer spending shift from goods to services. The producer-price index, an inflation indicator, rose 0.7%, excluding food and energy.

• Investors were also bracing for a key announcement on rates and fiscal policy from the Federal Reserve, to come on Thursday. The Fed could signal that it is close to reducing the size of its bond purchasing programme. That would lower bond prices and lift their yields, a negative for stock valuations. Our expectation is for the Fed to leave its fed funds rate at 0.00-0.25%, keep buying US$120 billion a month of bonds and stress that surges in inflation as the economy reopens will still only be temporary. However, the Fed is also likely to discuss when to start slowing asset purchases and its forecasts may show rate hikes from 2023 rather than 2024.

• The hawkish tweaks are set to push Treasury yields back up, support the soft US Dollar this week and temper gold. But the Fed’s overall dovish stance will still keep benefiting risk assets this year.

• Japan’s Nikkei Stock Average closed 1.0% higher, supported by consumer and pharmaceutical stocks. Chinese stocks ended lower, extending Friday’s broad declines after a three-day break, dragged by financial and mining shares even as auto makers gained. The Shanghai Composite Index fell 0.9%, the Shenzhen Composite Index dropped 0.8%, and the ChiNext Price Index closed 1.1% lower. Singapore shares advanced as investor optimism was boosted by news that private-sector economists further raised their full-year outlook for Singapore’s gross domestic product to a growth of 6.5%, up from 5.8% in March. The Straits Times Index was up 0.7% to finish at 3,174.87.