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Market Wire:
Retail Sales Surge, Reducing Odds On Sustained Monetary Easing

Karl Schamotta July 16, 2019

American consumers continued to spend last month, with a surge in retail sales helping to offset market fears of a slowing economy. Numbers released by the Census Bureau this morning show that receipts rose 0.4% in June, up 3.4% over the year prior as households increased spending on a wide range of products. Markets had expected growth to hit 0.1%.

So-called “control group” sales – excluding food services, auto dealers, gas, and building materials – rose 0.7%. This beat expectations, and will carry importance for the Federal Reserve’s preferred inflation measure – the core personal consumption expenditures index – which also strips out more volatile spending categories.

Data for April was revised down to 0.4% from the 0.5% previously reported.

The print is unlikely to dissuade the Federal Reserve’s rate-setting committee as it prepares to ease monetary policy at the end of the month – but it adds to evidence showing that the economy is staging a solid rebound after a soft first quarter. Consumer spending is helping to offset losses in business investment and will likely cut into the inventory overhang that emerged earlier in the year – helping to stabilize overall gross domestic product projections.

With traders lowering odds on a meaningful series of rate cuts, a steepening yield curve should help to limit the losses that the dollar typically suffers as an easing cycle begins.

In contrast, the euro is down, and 10-year bund yields are trading at -0.31% this morning after a survey by the Center for European Economic Research (ZEW) showed that views on the German economy continued to deteriorate in July. Tensions in the Middle East, a slowdown in exports to China, and uncertainties surrounding the United Kingdom’s divorce process were mooted as factors in pushing the sentiment index down by 3.4 points to 24.5 – near lows reached in October last year.

Bottom Line: US consumers remain blissfully unaware of the darkening clouds over the global economy – which, ironically, helps to brighten prospects for the selfsame global economy. When combined with the central bank-assisted easing in financial conditions that has occurred over the last two months, the stage is set for continued strength in economically-sensitive assets and currencies.

Karl Schamotta
Chief Market Strategist


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