The Americans continue spending and that’s bad news for the entire world. Announced yesterday the July retail sales data came in better-than-expected in the US. Sales grew 0.7% on a monthly basis and more than 3% on a yearly basis – the biggest figure since January, when sales soared by 3% as well. Amazon’s Prime day apparently helped boost online sales, while demand for bigger items including furniture and auto parts declined. But all in all, the American consumer spent 3% more compared to a year ago, Home Depot reported small earnings beat yesterday and its CEO confirmed that ‘fears of a recession have largely subsided, and the consumer is generally healthy… while adding that ‘uncertainties remain’. Uncertainties remain, yes, but the resilience of the US consumer spending sapped investor sentiment by fueling inflation expectations and Federal Reserve (Fed) hawks, yet again. The US 2-year yield spiked above the 5% mark, but bounced lower, certainly helped by a big drop in Empire State manufacturing in August, the 10-year yield flirted with 4.30%, while major stock indices fell. The S&P500 closed below the 50-DMA, which stands at 4446, Nasdaq 100 remained offered below its own 50-DMA, at 15175, while Russell 200 slipped below the 50-DMA.
In the FX, the strength of the US consumer spending is reflected as a stronger US dollar across the board. The US dollar index remains bid, while Cable bulls resist to the bears around the 1.27, and above the 200-DMA, which stands near 1.2620, as the data released yesterday showed that wages in Britain accelerated at a record pace. Happily, this morning’s inflation data poured some cold water on the fire, as the CPI fell from 7.9% to 6.8% in July, as expected, yet core inflation remained steady at 6.9%, while the core PPI came in higher than expected. On the food front, grocery prices also fell more than 2 percentage points to 12.7%. But 12.7% is still a very high number. As a result, odds for a 50bp hike at the Bank of England’s (BoE) September meeting is given a 1 over 3 chance, the 2-year gilt yield is back above 5%, and looks like it’s there to stay, as the peak BoE rate is seen at 6%.
Across the Channel, the 10-year bund yield is also pushing higher near a decade high, and all eyes are on the European GDP and industrial production data this morning. The European economy is weakening due to the rising rates, tightening credit conditions and high energy prices, but the fact that the labour market remains tight in Europe as well remains a major concern for inflation expectations for the European Central Bank (ECB), which will let the economy sink further if it doesn’t take further control over inflation. Therefore, the EURUSD will certainly react negatively to a weak European data set today, and the pair could re-test the minor 23.6% Fibonacci retracement level, at 1.0870, but figures more or less in line with expectations should not change the ECB’s hawkish tilt. The problem is, there is nothing the ECB could do – other than restricting financial conditions – regarding the energy and gas prices – which move parallel to completely external factors like the Ukrainian war and labour strikes in Australia. In this sense, the Dutch TTF futures were again up by 12% yesterday, while US crude tanked near the $80pb level, pressured lower by 1. the surprise Chinese rate cut’s inability to spark interest in risk assets, 2. news that China’s imports of sanctioned Iranian hit a record high of 1.5mbpd this month – that oil trading at around $10 discount to Brent and 3. the latest data from the API hinting at an almost 7mio barrel decline in US crude inventories last week. The more official EIA data is due today, and the consensus is a 2.4 mio barrel fall. US crude could well slip below the $80pb on slow growth concerns, but Saudis will fight to keep the price above $80pb in the medium run.
Back to the inflation talk, the recent rise in energy and food prices is concerning for the euro area’s inflation in the next readings. Therefore, the falling inflation trend remains in jeopardy, as the discussion of an ECB pause on rate increases.
The Reserve Bank of New Zealand (RBNZ) held its cash rate unchanged for the 2nd consecutive month but warned that there is a risk that activity and inflation measures do not slow as much as expected, and that they won’t be cutting rates until the Q1 of 2025. The kiwi extended losses against the greenback, but the selloff remained contained.
Due today, the FOMC minutes will likely show that the Fed officials remain cautious despite the latest fall in inflation numbers, for the same reasons: rising energy and food prices that are sometimes driven by geopolitical events and that the Fed could only watch and adopt. The Fed is expected to hold fire on its rates in the September meeting, but nothing is less guaranteed than the end of the tightening cycle before the year end.
 hawks, yet again. The US 2-year yield spiked above the 5% mark, but bounced lower, certainly helped by a big drop in Empire State manufacturing in August, the 10-year yield flirted with 4.30%, while major stock indices fell. The S&P500 closed below the 50-DMA, which stands at 4446, Nasdaq 100 remained offered below its own 50-DMA, at 15175, while Russell 200 slipped below the 50-DMA.){kind=link}