Retail sales data fails to move the needle on need for bigger cut

US retail sales came in broadly as expected in August in data released yesterday. While the headline figure exceeded expectations as it expanded 0.1% m/m (the prediction had been for a 0.2% contraction following the 1.1% expansion in July), when stripping out autos and gas, growth was below expectations with an expansion of 0.2% rather than the predicted 0.3%. There was nothing definitive in the data that makes a 50bps cut from the FOMC today more likely in our opinion. As such, we are holding to our expectation of a quarter-point move. The risks for further easing have increased though we still think that would come in the form of one additional 25bps cut this year (on top of the two 25bps cuts that form our baseline) rather than an emergency need for a larger move.

US industrial production data was also released yesterday, showing a 0.8% m/m expansion in August, recovering from a 0.9% contraction the previous month (revised from 0.8% previously). The August print was far stronger than the predicted 0.2% expansion as output bounced back strongly from the hurricane-driven disruption of the previous month.

There was a marked deterioration in the expectations component of Germany’s ZEW survey in the September print as it came in at just 3.6, the weakest reading for the index since last October and down from 19.2 the previous month. This was well below the predicted 17.0. A series of bad news stories from the manufacturing sector, including the news that Volkswagen might close domestic factories, weighed on sentiment alongside recent political surprises and the wider pessimism increasingly prevalent throughout the Eurozone. Meanwhile the current situation index also deteriorated, dropping to -84.5 from -77.3 in August and missing the predicted -80.0.

Etihad Airways has reported that it carried 12mn passengers over January to August, up 36% compared with the same period in 2023. Transport, driven in large part by the national airlines, has been a key component of economic growth in the coming out of the pandemic and the aviation sector has continued to perform well this year.

Annual CPI inflation in Canada fell to 2.0% y/y in August, down from 2.5% in July and lower than the predicted 2.1%. This was the first time that Canada’s price growth had hit the target 2.0% since February 2021. Prices were 0.2% lower than the previous month. The Bank of Canada’s next meeting is on October 23, with the chance of faster easing if the next inflation print also comes in soft.

Today’s Economic Data and Events

10:00 UK CPI inflation, % y/y, August. Forecast: 2.2%

22:00 US FOMC rate decision. Forecast: 5.25% (25bps cut)

Fixed Income

• US treasuries sold off on the release of the August retail data, with nothing within it enough to make a larger 50bps cut from the FOMC more likely. Yields on the 2yr bounced off the recent lows, rising 5bps to 3.6048%. The less immediately rate-sensitive 10yr rose by a lesser 3bps to 3.6456%.

FX

• The dollar index snapped its losing streak yesterday as it gained against its basket of peers for the first session since last Wednesday, gaining 0.1% on the day.
• JPY was a notable mover as it lost 1.3% against the greenback, climbing back up to 142.41, though this is still far stronger than the 160 levels seen a short time ago. GBP lost 0.4% to 1.3161, while EUR closed 0.2% lower at 1.1114.
• A notable exception was AUD which added 0.1% to 0.6756, although the other major commodity currencies CAD and NZD both closed lower, by 0.1% and 0.3% respectively.

Equities

• In Japan, the Nikkei lost ground on Tuesday as it reopened after Monday’s holiday, falling 1.0%. The Shanghai Composite remained closed, but the Hang Seng added 1.4%.
• In the US there were only modest moves ahead of today’s FOMC decision, with the S&P 500 and the Dow Jones both closing almost flat, while the NASDAQ added 0.2%.
• Locally, the DFM closed flat while the ADX added 0.4% on the day.

Commodities

• Rising tensions in the wider Middle East saw oil prices pick up for a second day running on Tuesday. Brent futures closed 1.3% higher at USD 73.7/b, while WTI added 1.6% to USD 71.2/b.
• The weekly US inventory report from the API showed that crude stockpiles rose 1.96mn bbl last week.