Group Economics
Daily Insight
Macro & Financial Markets Research Maritza Cabezas, Arjen van Dijkhuizen, &
US consumer comeback
Georgette Boele +31 20 343 5616
14 August 2015
US retail sales accelerated in July, boosting rate hike expectations After adjusting USD-CNY fixing for the third day in a row, China acts to ease devaluation fears Global investor sentiment looks to be entering calmer waters
US retail sales rebound in July
US retail sales rebound
Retail sales rebounded strongly in July, while June’s sales were revised up. Retail sales increased 0.6%. Meanwhile, core retail sales, excluding gas and cars, rose 0.3% up from 0.2% the previous month. This report adds to the picture of an economy growing above-trend, following the solid July employment report released last week. This gives more ground for the Fed to hike rates in September. Fed policymakers have mentioned that labour market would need to show “some” improvement before a rate hike. Gains in most retail categories
% 3mo3m, annualised 12 10 8 6 4 2 0 -2 -4 -6 09
10
11
Retail sales
12
13
14
15
Retail sales ex-gas and vehicles
Source: Thomson Reuters Datastream
The report showed solid growth in most retail categories. Consumers purchased more vehicles and building materials. Meanwhile, gasoline sales rose by 0.4% in July, much lower than the 1.8% the previous month. Lower oil prices will put downward pressure on gasoline prices at the pump this month.
After adjusting USD-CNY fixing again, … On Thursday, the PBoC raised the USDCNY fixing rate for the third day in a row, bringing the cumulative adjustment this week to 4.7%. This adjustment was in line with the central bank’s statement on Tuesday to bring the reference rate more
Strong labour market to boost consumption further
in line with actual market movements.
We expect the economy to strengthen in the second half of the year. Consumers should continue to spend given the ongoing improvement in the labour market and firmer wage growth. On top of this, low gasoline prices will increase the purchasing power of consumers.
… China eases devaluation fears However, the PBoC also took action to take away fears of a massive CNY devaluation, by stepping up (verbal) support. These actions helped the yuan to recover somewhat, bringing the total weakening versus the USD to 3% so far this week.
Fed rate hike likely in September We do not expect the devaluation of the yuan or concerns about China’s economic outlook to prevent the Federal Reserve from raising interest rates next month. Indeed, the improving US economic data flow is making a September move increasingly likely. Markets priced in a greater probability of a rate hike following the retail sales report, but a hike next month is still not fully priced in.
Market sentiment enters calmer waters The turnaround in US equities on Wednesday had a positive impact on sentiment in financial markets. In addition, the PBoC’s re-assurance of the yuan also spurred a more optimistic investor climate. As a result, equity markets generally firmed, US Treasury and German Bund yields moved higher, the US dollar recovered and gold prices moved lower. The stronger than expected US retail sales report even reinforced these moves. Going forward we expect the US dollar to strengthen on expectations of a start of the US tightening cycle in September.