(Reuters) - U.S. retail sales rose more than expected in July, which could help to allay financial market fears of a sharp economic slowdown that were fanned by a jump in the unemployment rate.
Meanwhile another report showing a smaller than expected increase in the number of American's filing for unemployment benefits last week showed resilience rather than deterioration in labor market conditions and lifted stock futures, Treasury yields and the dollar.
Futures traders raised the odds to about 75% that the Federal Reserve will ease by just 25 basis points in September, after the Commerce Department said retail sales increased 1.0% last month after a downwardly revised 0.2% drop in June. Economists polled by Reuters had forecast retail sales advancing 0.3% after previously being reported as unchanged.
MARKET REACTION:
STOCKS: S&P 500 (SPX) opened more than 1% higher BONDS: The yield on benchmark U.S. 10-year notes rose to 3.947%, the two-year note yield jumped to 4.097% FOREX: The dollar index turned 0.5% higher
COMMENTS:
DAVID DOYLE, HEAD OF ECONOMICS, MACQUARIE, TORONTO
"The report isn't quite as favorable for disinflation as what occurred in June, but that report set a very high standard."
"Overall the report provides more reinforcement that the disinflation trend remains in tact. It should provide the FOMC with increased evidence that the upturn in underlying inflation that occurred in 1Q24 was temporary and has reversed course."
"There is nothing in here that should prevent the Fed from proceeding with a rate cut in September. The pace of magnitude of easing will depend broadly on incoming data with inflation and employment figures taking on particular importance. Our baseline for a September cut is for this to be 25 bps."
TOM GRAFF, CIO, FACET, PHOENIX, MARYLAND
"Retail sales is a very volatile number month-to-month, so we should be careful putting too much weight on any one release. That being said, this number does not indicate some kind of slowdown is imminent.
“Note also that Walmart (NYSE:WMT) in their earnings release today raised their 2024 outlook, which further bolsters the idea that consumers are still spending at a reasonable clip.
“On these margins, this means there is less pressure on the Fed to cut rates rapidly. We are of the belief that the Fed is prepared to cut rates toward neutral relatively quickly. However, the Powell Fed has rarely acted quickly at pivot points in the past. A dramatic 50bps cut to start off this cutting cycle would be quite a departure for him, and therefore is unlikely without more worrisome data.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“Today’s key data was retail sales, which showed that the pulse of the American consumer is obviously much stronger than expected.”
“This diminishes fears of a recession any time soon and it is good news in terms of stocks but may not be good news for the bond market.”
“With this report, we’re back to square one, with the Fed probably cutting rates by 25 basis points in September. Chances are diminishing for a more robust 50-basis-point cut.”
“Today’s retail sales are positive for corporate America. It means consumers are not hibernating. It bodes well for corporate earnings but in terms of what the Fed will or will not do, it raises a red flag.”
STEVE WYETT, CHIEF INVESTMENT STRATEGIST, BOK FINANCIAL, TULSA, OKLAHOMA
"The overall message that I would take from this number is that the angst that the market was feeling a week and a half ago after a weaker than expected employment report and this idea that the Fed was dropping behind and that the economy was sliding into a recession and we built in 50 basis points in easing in September is just backing that off."
"The economy is not going into a recession imminently. This will take 50 basis points in September off the table. Still think that 25 basis points make sense just because inflation continues to ease and we got a couple of good reports, PPI and CPI adding to that."
"We have the all-important employment data before the next Fed meeting but this should reduce the feelings that the economy is imminently going into a recession."
"The early calls during that market volatility for the Fed to do something on an emergency basis now look even further out of line than what we felt they were at the time they were made."
CHRIS LARKIN, MANAGING DIRECTOR, TRADING AND INVESTING, E*TRADE FROM MORGAN STANLEY, NEW YORK
"Today didn’t deliver any major curveballs. More data like this could ease concerns that the economy is tilting toward recession and take pressure off the Fed to cut rates more aggressively than they’d like to."
BRET KENWELL, U.S. INVESTMENT ANALYST AT ETORO, PETOSKEY, MICHIGAN (via email)"The retail sales report beat expectations across the board, with strong headline figures and stronger-than-expected control group sales — the most stringent cut of data within the report. We’re back to an environment where good news is good news and bad news is bad news." "Given the recent worries over the labor market, today’s lower-than-expected jobless claims data is another positive and marks the second consecutive miss for this report. Combined with a strong retail sales report, investors are breathing a sigh of relief this morning, letting recent worries of economic softness subside. While it would still be appropriate for the Fed to lower rates next month, today’s reports should buy them some time until the September meeting."