Better retail sales and jobs numbers for the US economy

US retail sales in July were much stronger than expected, rising by 1% m/m in nominal terms. That compared with flat activity a month earlier and expectations of a 0.4% gain. Core retail sales, which feeds into calculations of GDP, rose by 0.3% m/m compared with expectations of a 0.1% gain. The strong performance of consumer data is pushing back against fears that the US is poised to imminently enter a recession after weaker jobs numbers were released earlier this month. Weekly jobs numbers also showed some improvement with initial jobless claims for the week of August 10 dropping to 227k from 233k a week earlier while continuing claims also declined. Markets are continuing to pare their rate cut expectations for September further away from 50bps.

The UK economy expanded by 0.6% q/q in Q2 2024, slightly slower than 0.7% recorded in Q1 but much stronger than levels recorded in 2023, when the UK entered a recession in the second half of the year. Consumer spending rose by 0.2% q/q in Q2, down from 0.4% in the prior period, while fixed capital formation—investment—rose by 0.4%. In terms of contribution to growth, capital formation was the largest share while net exports were a drag on overall growth thanks to a strong rise in imports. The Bank of England is likely to cut rates later this year which should provide more tailwinds for the UK economy while wage growth continues to be positive in inflation-adjusted terms.

Inflation in Saudi Arabia was marginally faster in July at 1.53% y/y, up from 1.5% a month earlier. On a monthly basis, prices were up 0.1%. As has been the consistent trend this year, housing and utilities have been the big drive of inflation with the subcomponent of the CPI basket up 9.3% y/y in July. Rental prices in particular were up by 12% according to the General Authority for Statistics. Food prices were up 0.4% y/y while transport and communication costs were both lower.

Today’s Economic Data and Events

• 10:00 UK retail sales July m/m: forecast 0.6%
• 16:30 US housing starts July: forecast 1.33m
• 18:00 US University of Michigan Sentiment August: forecast 66.9

Fixed Income

• Treasury yields spiked on the release of the retail sales report for the US. Yields on the 2yr UST jumped almost 14bps by the close to settle at 4.0929% while the 10yr yield added 8bps to 3.9131%. The data coming out of the US continues to suggest that an emergency adjustment is not required but that the Fed will be able to proceed with a steady downward path on policy.
• Bond markets elsewhere also drifted lower, led by Treasuries. European and emerging market bonds were lower while high-yield bonds did manage to tick higher.

FX

• The US dollar reversed ground against peers yesterday following the release of the retail sales numbers. EURUSD dropped by 0.4% to 1.0972 while USDJPY spiked by 1.3% to 149.28. Sterling was a notable outlier, encouraged by the positive GDP numbers, with GBPUSD up 0.2% at 1.2855.
• Commodity currencies closed mixed with AUDUSD higher by 0.2% at 0.6612 while USDCAD edged higher at the expense of the Loonie. NZDUSD also dropped, down 0.2% at 0.5986.

Equities

• While the retail sales numbers faded large rate cut expectations they did provide more confidence on the consumer, helping to support equity markets overnight. The Dow Jones added 1.4% while the S&P 500 rose by 1.6% and the NASDAQ gained a strong 2.3%. European markets were also higher with the EuroStoxx index up 1.7% and the FTSE gaining 0.8%.
• Local markets closed positively with the DFM rising by 0.1% and the ADX up 0.3%. The Tadawul rose by 0.6% overnight.
• Asian markets have opened up positively today with the Nikkei up nearly 3% so far.

Commodities

• Oil markets clawed back some gains overnight with Brent futures up by 1.6% to USD 81.04/b and WTI adding 1.5% to USD 78.16/b. The relatively soft data out from China earlier this week doesn’t appear to have derailed oil substantially while other commodity markets also managed to record gains overnight.