• Retail sales rose 0.7% on the month, well above the 0.3% Dow Jones estimate. Excluding autos, sales were up 0.6%, also well ahead of the forecast for just 0.2%.
• Sales gains were broad-based on the month, with the biggest increase coming at miscellaneous store retailers, which saw an increase of 3%. Online sales rose 1.1%.
• The retail report is considered an important factor for the Federal Reserve as officials contemplate the future of monetary policy.

Consumers showed surprising strength in September, boosting retail sales well above expectations despite high interest rates and worries over a weakening economy.

Retail sales rose 0.7% on the month, well above the 0.3% Dow Jones estimate, according to the advance report the Commerce Department released Tuesday. Gas station sales helped propel the headline number, rising 0.9% as prices at the pump accelerated.

Excluding autos, sales were up 0.6%, also well ahead of the forecast for just 0.2%. The so-called control group, which strips out items such as auto dealers, gas stations, office supply stores, mobile homes and tobacco stores and is used for the department's GDP calculation, rose 0.6% as well.

The numbers are not adjusted for inflation, so they indicate that consumers more than kept up with price increases. The consumer price index, released last week, showed headline inflation up 0.4% in September.

On a year-over-basis, sales rose 3.8%, compared with the 3.7% increase for the CPI.

Treasury yields moved higher after the report while stock market futures added to losses.

"The U.S. consumer cannot stop spending," said David Russell, global head of market strategy at TradeStation. "All three retail sales reports for Q3 were above estimates, which puts us on track for a strong GDP number later this month. It also gives the Fed zero reason to loosen policy, which keeps the 10-year Treasury yield pushing toward 5%."

Sales gains were broad-based on the month, with the biggest rise coming at miscellaneous store retailers, which saw an increase of 3%. Online sales climbed 1.1% while motor vehicle parts and dealers saw a 1% increase and food services and drinking places grew by 0.9%, good for a yearly increase of 9.2%, which led all categories.

There were only a few categories that showed a decline; electronics and appliances stores as well as clothing retailers both saw decreases of 0.8% on the month.

The retail report is considered an important factor for the Federal Reserve as officials contemplate the future of monetary policy. While markets largely expect the Fed is done raising rates for this cycle, an unexpectedly strong consumer complicates the equation.

In other economic news Tuesday, the Fed reported that industrial production increased 0.3% in September, above the 0.1% estimate. Capacity utilization, or the level of potential output, edged up to 79.7%, 0.1 percentage point above the estimate. Also, the Commerce Department reported that total inventories increased 0.4% in August, one-tenth of a point above the estimate.

Fed Chair Jerome Powell is scheduled to speak Thursday in New York, an event that markets will be watching closely for some indication about where he thinks rates are headed. The rate-setting Federal Open Market Committee next meets Oct. 31-Nov. 1.

Market pricing assumes a near certainty that the FOMC will not hike then, but it could choose to do so at future meetings if economic data remains strong. The implied probability for a December hike moved up to about 43% after the release, compared with 34% on Monday, according to the CME Group's gauge of futures market pricing.

Richmond Fed President Thomas Barkin on Tuesday said some of the robust data coming in lately doesn't match with his on-the-ground observations that demand seems to be slowing.

"I see an economy that is much further along the path to demand normalization than much of the data would tell you. But the path for inflation isn't yet clear," Barkin, a nonvoting member this year on the Fed's rate-setting committee, told a group of real estate professionals. "We have time to see if we have done enough, or whether there's more work to do."

Consumers face headwinds going into the end of the year.

Employment growth is expected to slow though it, too, has defied expectations. Credit card balances are rising, with Bank of America reporting a 0.2% monthly gain in September balances. The resumption of student loan payments also is expected to impact spending.

Still, third-quarter economic growth is likely to be strong. Goldman Sachs on Tuesday raised its economic outlook following the retail data, with the firm now expecting GDP to accelerate at a 4% annualized pace in the third quarter.

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