Daily Market Update: Dollar advances as retail sales figures point to strong US growth
Friday’s retail sales numbers out of the US were better than anticipated.
Total sales rose by 0.6% m/m in June vs. 0.1% expected while the so-called control group of core sales (which strips out a number of volatile items including autos, gas and building materials) rose by 0.5%. Friday’s figures suggest the acceleration in overall consumer spending in Q2 was even sharper than previously expected. After rising by just 1.5% annualised in Q1, real spending is possibly on track to rise at a 4.5% annualised rate in Q2. This would leave the average pace of real consumer spending at around 3% over the first half of 2016, up from 2.7% in 2015. Building on the signals from the recent strong jobs report, these figures highlight the strength of the consumer sector which remains an important bright spot for the US economy. Driven by this consumer spending strength, overall real GDP growth now looks to be tracking at around 3% in Q2, importantly confirming a bounce back in growth after a(nother) distinctly lacklustre Q1 in which growth was a mere 1.1%.
Friday also brought news on the prices side of the US economy with core CPI inflation surprising slightly to the upside. A third consecutive monthly print of 0.2% brought a mild acceleration in the annual rate of core inflation from 2.2% to 2.3% - tying for the highest reading of the current cycle. This measure of core inflation was 1.8% a year earlier. The Fed will likely have taken some encouragement from recent developments showing resilience and strength in key household indicators (of jobs and spending) in our view. Coming at a time when measures of underlying price pressures have generally been drifting higher over the past 12 months (consistent with an economy that is continuing to use up remaining slack in its labour market), this is likely to leave policy makers continuing to favour the need for further withdrawal of monetary stimulus. Of course, a key unknown is the potential fallout from Brexit which could impact the US via a stronger dollar and or weaker global growth. It is likely that the Yellen Fed (which has consistently taken a cautious view of the outlook) will want to hold off of any further policy tightening until there is greater clarity on Brexit risks. Having said that, it looks to us that current pricing in US interest rate markets looks very light, with a 25bps hike not priced in until the end of 2017. US interest rate markets are thus not priced for the resilience which we think the US economy can demonstrate in the months ahead, leaving us favouring upside for both US market interest rates and the dollar as we look forward. Indeed, helped by the spending and prices dataflow, the dollar had advanced against both the euro and sterling since early Friday. Eur/USD is down by about 0.6% to open at around $1.1050 while the greenback has risen by considerably more (1.1%) against an under-pressure pound to open the week at $1.3255 as the week’s trading kicks off in Europe.