Morning Commentary: The Consumer is Alive and Kicking!

Foreign Exchange - Morning Commentary

The Consumer is Alive and Kicking!

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The June U.S. Retail Sales Report is the main story for today; U.S. June retail sales came in much stronger than forecast at 0.4% against expectations of a gain of 0.2% and follows a revised gain of 0.4% for May. Q1 results for retail sales were surprisingly weak, but Q2 results are showing that the consumer is alive and kicking.
Adding to the upbeat nature of the report were sales in the “control group” subset which widely beat expectations rising by 0.7% against consensus estimates of a rise of 0.3%. 11 of the 13 major retail categories increased, led by a 1.7% increase in nonstore retailers. Retail sales is a very important component of GDP as 70% of consumer spending drives GDP growth. Q2 GDP comes out on July 26 with an early estimate of GDP near 1.9% following a 3.1% gain in Q1.
The net result for the markets is that U.S. interest rates have jumped higher across the yield curve. An early warning sign of an impending recession is an inverted yield curve, specifically the U.S. 3-month yields versus U.S. 10-year yields. This yield curve has been inverted since May 23. July 5 saw the lowest negative yield inversion of -27 bps; today it stands at -2 bps.  While markets still fully anticipate a Fed rate cut at the end of the month, markets are recalibrating the aggressive rate cuts planned for down the road. Higher U.S. interest rates today have allowed the U.S. dollar to strengthen but primarily against European currencies.
  • The British pound is the weakest of the major currencies today despite a better-than-expected May U.K. Jobs Report. The unemployment rate remained at its lowest level of 3.8% since the mid-1970s, and wages grew at the fastest pace in 11 years with wage gains above expectations at 3.4%. The GBP is weaker today on the back of last night’s comments by Tory PM candidate Boris Johnson that he will renegotiate PM May’s Brexit deal and now sees firmer red lines than PM May, increasing the chances of a no-deal Brexit. The GBP is now sitting at its lowest level of the year.
  • U.S. Industrial Production for June came in below expectations at 0.0% against an expected gain of 0.1%. Today’s report follows a strong gain of 0.4% in May. U.S. interest rates were largely unaffected.
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