Unexpectedly soft U.S. retail sales data for December, released on Tuesday, weakened market confidence in U.S. economic growth, propelling Treasury prices higher and pushing yields further down. The data indicated a significant loss of momentum in consumer spending at the end of the previous year, prompting a market reassessment of the outlook for economic growth, inflation, and the path of interest rates in the current year. Retail sales were unchanged month-over-month in December, falling far short of the anticipated 0.4% increase and showing a notable slowdown from November's 0.6% growth. This outcome suggests consumer spending notably lost steam towards year-end, intensifying concerns about an economic slowdown. Analysts suggest this may indicate that the trajectory for interest rates and inflation this year could be lower than previously forecast.

Jay Hatfield, CEO of Infrastructure Capital Advisors, stated, "Previous market fears about an overheating economy were completely misplaced." Earlier in January, the third-quarter U.S. GDP growth rate had been revised up to an annualized 4.4%, leading to a prevailing view that robust economic strength would increase inflationary pressures, limit the Federal Reserve's capacity for interest rate cuts, and consequently push Treasury yields higher. However, the latest retail sales figures have altered this expectation.

U.S. Treasuries rallied across the board on Tuesday. The yield on the 10-year Treasury note retreated to 4.14%, down 5.3 basis points from the previous session and marking its lowest level in nearly four weeks; this yield had previously climbed to 4.3%. The 30-year Treasury yield fell 6.1 basis points to approximately 4.79%, its lowest since January 15th. In the bond market, yields move inversely to prices, so a decline in yield signifies rising bond prices.

Concurrently, bets on interest rate cuts in the futures market intensified noticeably. According to the CME Group's FedWatch tool, traders now assign a 19.6% probability to a 25-basis-point rate cut by the Fed next month, up from 17.2% the previous day. Furthermore, market expectations for a total of three to four rate cuts within the year have also increased, significantly exceeding the policy signals previously communicated by Fed officials.

Gregory Daco, Chief Economist at EY-Parthenon, noted in a report, "The December retail sales report was quite dismal. While some higher-income households maintained relatively strong spending capacity during the holiday season, the majority of consumers are spending more cautiously and increasingly relying on credit cards and savings to sustain their expenditures."

The impact of the weak U.S. economic data quickly transmitted to international markets. Government bond prices in the UK, France, and Germany strengthened in tandem following the U.S. retail sales release. Hatfield pointed out that since "the U.S. typically leads the global economy," the rally in European debt markets was partly influenced by the U.S. data, with current indications suggesting a global economic slowdown that could lead to lower interest rates. He added, "We believe inflation could decelerate significantly in the first quarter, potentially driving the 10-year Treasury yield below 4%."

Meanwhile, following the data release, the Atlanta Fed's GDPNow model revised down its forecast for U.S. real GDP growth to 3.7% from 4.2%.