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Summary

In the month of July retailers saw a sales increase of $6.8 billion, or 25% of the total gain from the prior two years in a single month. While most of that was an autos bounce after an ugly June, gains were broadly based and thus at odds with reports of a more cautious consumer.

They Might Be Choosy, But Consumers Are Still Spending

Retailers increased sales more than twice as fast as the consensus had estimated in July. That is true whether describing headline retail sales (+1.0% vs. 0.4% expectation) or the measure that excludes autos and gas (+0.4% vs. 0.2% expectation). Perhaps the most remarkable development though is that control group sales, a favored tool for predicting PCE spending in the GDP report, increased 0.3% in July. Coming on the heels of a 0.9% gain in the prior month, the upshot is more solid goods spending than most forecasters, ourselves included, had expected.

Less than two weeks ago, broad-based weakness in the July jobs report sent global financial markets into a tailspin and re-ignited fears of U.S. recession. In our August forecast update, we described how despite it being somewhat counter-intuitive, recent consumer spending numbers have come in stronger even as labor market indicators have come in weaker. Today's retail sales report is the latest development on this theme. That spending momentum in July positions spending for a solid third quarter.

Prior to this release we had already been expecting a decent outturn for Q3 spending and forecast total real PCE was set to rise at a 2.3% annualized clip in Q3, essentially matching the Q2 pace. Sales leaped $7 billion in July, which equates to about a quarter of the gain we've seen over the past two years for retail in a single month. To say July sales popped is somewhat of an understatement, and it easily sets us up for stronger growth in Q3 than we had been anticipating previously even with some potential payback in August.
Source: U.S. Department of Commerce and Wells Fargo Economics

As was widely expected, the place where sales picked up the most was the largest category: auto dealers. A slump in June set up July for a solid gain of 3.6%. This is made somewhat more impressive by the fact that the CPI report showed auto prices are actually down over the past year. Some old familiar friends have returned to auto dealerships to help move inventory including more attractive financing terms, manufacturer rebates and dealer incentives.

Elsewhere, stores reported broad-based gains across most store types. The only categories that were down were clothing, sporting goods and miscellaneous. If one were to judge only from consumer company earning announcements, little of this makes sense.

The CEO of a major retailer in the building materials and garden equipment space earlier this week noted a “deferral mindset” among their shoppers. While a leading general merchandise retailer today described shoppers at their stores as being “discerning, choiceful, value-seeking.”

Labor market data have grown in importance as the Fed has shifted its focus back to the jobs market, and by extension the health of the consumer matters. Even though inflation and employment are the sole mandates, the Fed cannot afford to look past consumer behavior.
Source: U.S. Department of Commerce and Wells Fargo Economics

We've long held the view that continued consumer resilience depends on income growth as savings are no longer in excess and access to affordable credit has dwindled. With retail sales having held up through July, it somewhat walks back the urgency for an aggressive Fed pivot. Yet retail sales are limited in their growth signal as they mostly cover goods consumption and are subject to large monthly revisions. The more comprehensive personal income and spending report out later this month will be key to gauging consumer resilience, but the July retail report was a positive economic development. It's the latest reminder that its tough to bet against the US consumer.

The Australian dollar is in positive territory on Thursday. AUD/USD is trading at 0.6607 in the European session, up 0.16% on the day at the time of writing. Earlier, the Aussie rose as high as 0.6633 (0.48%) before retracting.

Australian job growth jumps but unemployment rises

The Australian employment report for July was an interesting mix. Job growth remained strong as the economy added 58.2 thousand jobs, up from a revised 52.2 thousand in June and crushing the estimate of 20 thousand. Full-time employment rose by an impressive 60.5 thousand as part-time jobs dipped by 2.3 thousand.

At the same time, the unemployment rate nudged higher to 4.2%, up from 4.1% in June which was also the market estimate. This marked the highest unemployment rate since January 2022, but the increase was reflective of a higher worker participation rate.

Overall, the employment report was positive and supports the Reserve Bank’s hawkish stance on rate policy. Last week, RBA Governor Bullock said that a rate cut was unlikely for the next sixth months. The markets are more dovish and anticipate a rate cut before the end of the year. Still, the markets have pared the likelihood of a November rate cut to 45%, down from 55% prior to the employment release.

On the inflation front, consumer inflation expectations rose to 4.5% in August, up from 4.3% in July and the highest level since April. This release also supports the case for the RBA to continue its rate policy of “higher for lower” until inflation data move closer to the target band of 2% to 3%. The RBA holds its next policy meeting on September 24.

AUD/USD Technical

• AUD/USD is testing resistance at 0.6612. Above, 0.6628 is a weak resistance line, followed by 0.6659
• 0.6581 and 0.6566 are the next support levels

Daily Pivots: (S1) 161.02; (P) 161.81; (R1) 163.02; More...

EUR/JPY's break of 38.2% retracement of 175.41 to 154.40 at 162.42 suggests that fall from 175.41 has completed at 154.40. Rise from there is now seen as the second leg of the corrective pattern from 175.41. Intraday bias is on the upside or 61.8% retracement at 167.38 next. On the downside, below 160.57 minor support will turn bias back to the downside for 154.40 instead.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). Current development suggests that the first leg has completed. The range of consolidation should be set between 38.2% retracement of 114.42 to 175.41 at 152.11 and 175.41 high.

Daily Pivots: (S1) 146.40; (P) 147.00; (R1) 147.91; More...

Immediate focus is now on 38.2% retracement of 161.94 to 141.67 at 149.41 as USD/JPY's rebound from 141.67 extends. Decisive break there will bring stronger rally to 61.8% retracement at 154.19, even as a corrective move. On the downside, break of 146.06 minor support will suggest rejection by 149.91, and turn intraday bias back to the downside for retesting 141.67 low instead.

In the bigger picture, fall from 161.94 medium term is seen as correcting whole up trend from 102.58 (2021 low). Deeper decline could be seen to 38.2% retracement of 102.58 to 161.94 at 139.26, which is close to 140.25 support. In any case, risk will stay on the downside as long as 55 W EMA (now at 149.77) holds. Nevertheless, firm break of 55 W EMA will suggest that the range for medium term corrective pattern is already set.

Daily Pivots: (S1) 0.8625; (P) 0.8643; (R1) 0.8669; More….

Intraday bias in USD/CHF is back on the upside as rise from 0.8413 resumed by breaking through 0.8710. Focus is now on 38.2% retracement of 0.9223 to 0.8431 at 0.8734. Sustained break there will bring stronger rally to 61.8% retracement at 0.8920, even as a corrective move. On the downside, break of 0.8616 will turn bias back to the downside for retesting 0.8431 low.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with fall from 0.9223 as the second leg. Strong support could be seen from 0.8332 to bring rebound. Yet, overall outlook will continue to stay bearish as long as 0.9243 resistance holds. Firm break of 0.8332, however, will resume larger down trend from 1.0146 (2022 high).

Retail sales rose 1.0% for the month of July. That was much higher than the consensus forecast calling for a more moderate increase of 0.4%. However, June's figure was revised downward to -0.2% month/month (previously flat).

Trade in the auto sector was up 3.6% m/m, as the increase at motor vehicle dealers (4.0%) was partially offset by the decline at automotive parts and accessory stores (-0.8%).

Sales at gasoline stations rose a marginal 0.1% m/m, breaking two consecutive months of sizeable declines. The building materials and equipment category rose by 0.9% m/m.

Sales in the retail sales "control group", which excludes the volatile components above (autos, building materials and gas) and is used to estimate personal consumption expenditures (PCE), rose 0.3% on the month after rising by 0.9% m/m in June.

• Among the control group, the largest positive contributions came from food and beverage stores (0.9% m/m), health and personal care stores (0.8%) and department stores (0.5% m/m).
• The largest declines were at miscellaneous stores retailers (-2.5% m/m) and sporting goods and hobby stores (-0.7% m/m).

Food services & drinking places – the only services category in the retail sales report –rose 0.3% m/m. June's data was also revised down to 0.1% (reported as 0.3% previously).

Key Implications

Retail sales opened up the third quarter on a better footing than it closed the second. The rebound suggests that despite mounting pressures on consumers' balance sheets (as savings dwindle and wage growth slows), the US consumer is not out yet. That said, consumer spending is still expected to slow as 2024 draws to a close.

The rebound in spending in July is unlikely to materially alter the outlook for a September rate cut. With employment continuing to slow and inflation more well-behaved in recent reports, it would take a much larger jolt form retail sales to alter the calculus for a cut. As such, for the remainder of the year we continue to expect three quarter-point rate cuts from the Fed (see Q&A).

Daily Pivots: (S1) 1.2806; (P) 1.2838; (R1) 1.2857; More...

Intraday bias in GBP/USD is turned neutral with current retreat and some consolidations would be seen below 1.2872 temporary top. But further rise is in favor as long as 1.2754 minor support holds. As noted before, pullback from 1.3043 could have completed at 1.2664 already. Above 1.2872 will target a retest on 1.3043 resistance first. However, break of 1.2754 will turn bias back to the downside for 1.2664 support instead.

In the bigger picture, as long as 1.3141 resistance holds (2023 high), medium term corrective pattern from there could still extend with another falling leg. But even in that case, downside should be contained by 1.2036/2298 support zone. Meanwhile, decisive break of 1.3141 will confirm resumption of whole up trend from 1.0351 (2022 low).

Daily Pivots: (S1) 1.0981; (P) 1.1014; (R1) 1.1046; More.....

Intraday bias in EUR/USD is turned neutral with current steep retreat. Some consolidations would be seen first. But another rally is in favor as long as 1.0880 support holds. Firm break of 100% projection of 1.0665 to 1.0947 from 1.0776 at 1.1058 could prompt upside acceleration through 1.1138 resistance to 161.8% projection at 1.1232. However, considering bearish divergence condition in 4H MACD, break of 1.0880 will suggest near term reversal and turn bias to the downside for 1.0776 support and below.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern that's could still extend. Break of 1.1138 resistance will be the first signal that rise from 0.9534 (2022 low) is ready to resume through 1.1274 (2023 high). However, break of 1.0776 support will extend the correction with another falling leg back towards 1.0447 support.

The US markets reacted positively today to stronger-than-expected retail sales data, which posted its fastest growth in a year and a half. Additionally, better-than-expected jobless claims numbers helped alleviate concerns about weaknesses in the employment market. The robust rally in US futures, along with rising yields and a stronger Dollar, suggests that traders have temporarily set aside recession fears.

Following yesterday's CPI data, which met expectations, Fed remains on course to cut interest rates in September. However, the likelihood of a large rate cut has diminished. Fed fund futures are now pricing in only a 25% chance of a 50 basis point cut, down from over 50% just a few days ago.

In the currency markets, Australian Dollar stands out as the strongest performer of the day, buoyed by much stronger-than-expected employment data. However, despite the initial surge, there is no clear follow-through momentum yet. Dollar is the second strongest, supported by positive economic data in the early US session.

Conversely, the Japanese Yen is among the weakest, as its near-term pullback seems to be evolving into a broader reversal amid rising US and European benchmark yields. Swiss Franc also weakened, pressured by a shift to risk-on sentiment. Euro, British Pound, and Canadian Dollar are trading in a more neutral position.

Technically, AUD/JPY is currently the biggest mover today, up more than 1%. The strong break of 38.2% retracement of 109.36 to 90.10 at 97.45 suggests that fall from 109.36 has completed at 90.10 already. Rebound from there is seen as the second leg of the medium term corrective pattern from 109.36. Further rise is now in favor as long as 96.75 minor support holds, to 61.8% retracement at 102.00 and possibly above.

In Europe, at the time of writing, FTSE is up 0.53%. DAX is up 1.11%. CAC is up 0.87%. UK 10-year yield is up 0.0845 at 3.913. Germany 10-year yield is up 0.055 at 2.240. Earlier in Asia, Nikkei rose 0.78%. Hong Kong HSI fell -0.02%. China Shanghai SSE rose 0.94%. Singapore Strait Times rose 0.90%. Japan 10-year JGB yield rose 0.0247 to 0.838.

US retail sales rose 1% mom in Jul, ex-auto sales up 0.4% mom

US retail sales rose 1.0% mom to USD 709.7B in July, above expectation of 0.3% mom. Ex-auto sales rose 0.4% mom to USD 576.1B, above expectation of 0.1% mom. Ex-gasoline sales rose 1.0% mom to USD 657.1B. Ex-auto& gasoline sales rose 0.4% mom to USD 523.4B.

Total sales for the May through July period rose 2.4% from the same period a year ago.

US initial jobless claims fall to 227k, vs exp 239k

US initial jobless claims fell -7k to 227k in the week ending August 10, lower than expectation of 239k. Four-week moving average of initial claims fell -4.5k to 236.5k.

Continuing claims fell -7k to 1864k in the week ending August 3. Four-week moving average of continuing claims rose 1k to 1862k, highest since November 27, 2021.

UK GDP flat in June, up 0.6% qoq in Q2

UK GDP showed no growth in June, matched expectations. Services output fell by -0.1% mom after five consecutive monthly increases. Production grew by 0.8% mom. Construction grew by 0.5% mom.

For Q2, GDP grew 0.6% qoq, matched expectations. Services grew by 0.8% qoq. Production fell -0.1% qoq. Construction also fell -0.1% qoq.

Japan's Q2 GDP grows 0.8% qoq on strong consumption and capital spending

Japan's economy showed stronger-than-expected growth in Q2, with real GDP rising by 0.8% qoq, surpassing the anticipated 0.6% qoq increase. On an annualized basis, GDP surged by 3.1%, well above the expected 2.1%. This marks a significant rebound after the sharp contraction experienced in Q1, and it is the first increase in two quarters.

The recovery was largely driven by a notable rise in private consumption, which increased by 1.0%. This is particularly significant as it follows four consecutive quarters of decline, a losing streak not seen since the aftermath of the 2008 financial crisis. Additionally, capital spending grew by 0.9%, marking its first gain in two quarters.

On a nominal basis, GDP increased by 1.8% in Q2, translating to an annualized rate of 7.4%. This growth pushed Japan's GDP above JPY 600T for the first time, a milestone attributed to the ongoing inflationary pressures driven by the weakening Yen.

Australia's employment surges 58.2k while unemployment rate ticks up

Australia's labor market showed robust growth in July, with employment rising by 58.2k, significantly surpassing expectations of 26.5k. This increase was driven by a strong gain in full-time employment, which rose by 60.5k, while part-time employment saw a slight decline of -2.3k.

Unemployment rate ticked up from 4.1% to 4.2%, slightly higher than the expected 4.1% and marking the highest level since November 2021. This increase in the unemployment rate comes alongside a rise in the participation rate, which climbed from 66.9% to a record high of 67.1%. Additionally, the employment-to-population ratio edged up by 0.1% to 64.3%, just shy of the historical high of 64.4% set in November of last year. Monthly hours worked also increased by 0.4% mom.

Kate Lamb, ABS head of labour statistics, noted that while the unemployment rate has increased by 0.1 percentage point in each of the past two months, the record high participation rate and near-record employment-to-population ratio indicate that "there continues to be a high number of people in jobs, and looking for and finding jobs."

RBNZ's Orr signals careful and measured rate reductions

RBNZ Governor Adrian Orr outlined the central bank's approach to its recent monetary policy shift in an interview with Bloomberg TV today. Following the unexpected rate cut that initiated the easing cycle yesterday, Orr emphasized that RBNZ intends to lower interest rates toward a more neutral setting at a "careful and measured pace." This strategy is aimed at ensuring that inflation expectations remain firmly anchored at the 2% target, which Orr stated is the central bank's "single focus."

Orr expressed confidence in the central bank's course of action, noting that key indicators of inflation pressures are moving in the right direction. RBNZ has been closely monitoring "price-setting behavior," "inflation expectations," and "domestic homegrown inflation components." According to Orr, all these factors are now aligned with the goal of restoring "low and stable inflation" over the next couple of years.

Furthermore, Orr highlighted that various economic indicators are pointing toward a positive outlook for growth. "We see positive economic growth coming and we can be easing interest rates," he said, expressing optimism that New Zealand could achieve "growth without the inflation."

China's industrial production slows while retail sales beat expectations

China's economic data for July revealed a mixed picture, with industrial production growth continuing to decelerate while retail sales showed unexpected strength. Industrial production rose by 5.1% yoy, down from 5.3% in June and missing the expected 5.2%. This also marks the third consecutive month of slowing growth.

On a more positive note, retail sales increased by 2.7% yoy, accelerating from the previous month's 2.0% and exceeding expectations of 2.6%.

However, fixed asset investment growth also disappointed, rising by 3.6% year-to-date compared to the same period last year, below the anticipated 3.9%.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0981; (P) 1.1014; (R1) 1.1046; More.....

Intraday bias in EUR/USD is turned neutral with current steep retreat. Some consolidations would be seen first. But another rally is in favor as long as 1.0880 support holds. Firm break of 100% projection of 1.0665 to 1.0947 from 1.0776 at 1.1058 could prompt upside acceleration through 1.1138 resistance to 161.8% projection at 1.1232. However, considering bearish divergence condition in 4H MACD, break of 1.0880 will suggest near term reversal and turn bias to the downside for 1.0776 support and below.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern that's could still extend. Break of 1.1138 resistance will be the first signal that rise from 0.9534 (2022 low) is ready to resume through 1.1274 (2023 high). However, break of 1.0776 support will extend the correction with another falling leg back towards 1.0447 support.

Economic Indicators Update

US initial jobless claims fell -7k to 227k in the week ending August 10, lower than expectation of 239k. Four-week moving average of initial claims fell -4.5k to 236.5k.

Continuing claims fell -7k to 1864k in the week ending August 3. Four-week moving average of continuing claims rose 1k to 1862k, highest since November 27, 2021.

Full US jobless claims release here.