US retail sales rise

• US retail sales rose by 0.3% in August, better than a 0.4% drop recorded for July. Stripping out petrol purchases, retail sales rose by 0.8%. However, the numbers are not adjusted for inflation so the higher overall spending was flattered by a near 3% nominal increase in car purchases, pushed upward by higher prices. Retail sales have slowed considerably since the start of the year when spending was closer to 2% in Q1 but even so they may not yet be slow enough to bring core inflation lower. Elsewhere in the US total industrial production dropped by 0.2% in August, slightly worse than market expectation. Manufacturing was higher by 0.1% as a drag in vehicle production weight on overall activity.
• Initial jobless claims in the US fell for a fifth week in a row to 213k in the week ending September 10th. While initial claims have moved higher from a trough recorded in March they remain lower than year-to-date highs over more than 250k per week and are well below 2021 and 2020 levels. Continuing claims were modestly higher at 1.403m in the week ending September 2nd.
• Luis de Guindos, the vice-president of the European Central Bank, said that monetary policy in the Eurozone was “Still accommodative, thus supporting demand” and contributing to “price pressures.” He said that “determined action is essential” for the ECB to fight back against inflation, setting the tone in the wake of the ECB’s 75bps hike to policy rates last week. ECB president Christine Lagarde didn’t appear to rule out further large hikes to policy rates and markets are pricing in another 75bps hike at the October ECB meeting.
• China’s economy showed some recovery in August as most indicators came in better than expected. Industrial production rose by 4.2% y/y, better than the 3.8% recorded a month earlier while fixed asset investment accelerated slightly to 5.8% year-to-date from 5.7% in July. Retail sales were much stronger, however, up by 5.4% y/y in August compared with 2.7% in July. An accommodative policy stance is helping to prevent a further decline in China’s activity this year even as the country’s Zero-Covid policy remains a drag on growth.

Today’s Economic Data and Events

• 10:00 UK retail sales August m/m: forecast -0.5%
• 18:00 US University of Michigan sentiment September: forecast 60

Fixed Income

• US Treasuries dropped further overnight, falling for six days in a row on the USD 2yr. Yields added almost 8bps to 3.8646% on the 2yr UST while in the 10yr yields added more than 4bps to 3.4489%. European bond markets were also lower overnight with 10yr bund yields up by 5bps to 1.762% while similar maturity 10yr French bonds added 4bps to 2.309%. Gilts also moved lower with yields up by 3bps.
• Bond markets were sold off overnight as risk sentiment eased. An index of USD emerging market bonds was lower by 0.14% while high yield bonds generally fell by 0.3%.

FX

• Currency markets were relatively quiet in majors overnight as data from the US showed a relatively mixed picture in the run up to next week’s FOMC. EURUSD settled higher by 0.2%, closing above parity at 1.0001% while GBPUSD showed more action, dropping by 0.6% to 1.1467. USDJPY reversed some of the prior day’s losses with a 0.3% gain at the expense of the Yen.
• In commodity currencies a general risk-off tone weighed against them. USDCAD added 0.47% to 1.3227 while AUDUSD dropped by 0.68% to 0.6702 while NZDUSD fell by 0.6% to 0.5966.

Equities

• US equity markets came under selling pressure once more yesterday, despite the better-than-expected retail sales data. Mounting recession worries and warnings around profits and the general outlook from high-profile firms saw all three major benchmark indices close down. The Dow Jones saw the softest drop at -0.5% while the S&P 500 and the NASDAQ lost -1.1% and -1.4% respectively. The S&P 500 closed at its lowest level in two months as a result.
• In the UK, the FTSE 100 managed to eke out a 0.1% gain, but both the DAX (-0.6%) and the CAC (-1.0%) closed lower.
• Locally, the ADX gained 0.5% and the DFM 0.9%.

Commodities

• Oil prices were caught up in the broad downswing in risk assets with Brent futures lower by 3.5% to USD 90.84/b and WTI falling by 3.8% to USD 85.10/b. The latest data from China will be of some relief the stimulus measures are preventing a total collapse in growth but oil demand will remain contingent on a change in the country’s restrictive Covid policies.

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