US Retail Sales: Positive spending momentum likely sustained - TDS

Research Team at TDS, suggests that the positive momentum in consumer spending activity is expected to be sustained in into the second half of the year, reflecting continued buoyancy in this crucial segment of the US economy.

Key Quotes

“In July, TD expects retail sales to rise at a relatively robust 0.4% m/m pace, following the equally impressive 0.6% m/m advance the month before. Much of the uptick in retail sales spending should be driven by strong auto sales activity, which would more than compensate for weaker gasoline spending, with spending excluding autos rising at a slightly more modest 0.2% m/m pace. Core spending, however, should rise at a decent 0.4% m/m pace, underscoring the supportive underlying backdrop for US economic activity in Q3. The risks to this call are to the downside.

Despite the strong start to the quarter, the medium term outlook for spending, however, has softened somewhat owing to the slowing in personal disposable income growth and the steady drawdown in savings will eventually temper spending momentum going forward.

University of Michigan Confidence, producer prices and business inventories will round out the calendar. The U. Mich. Sentiment Index is expected to improve in August after suffering a sharp decline in the wake of Brexit; both TD and the wider market look for a bounce to 91.5 from 90.0. We are likewise in line with the market in expected a 0.1% monthly gain in the headline PPI or 0.2% m/m excluding the impact of food and energy prices. Lastly, both TD and the market expect business inventories to grow by 0.1% m/m in June.

Foreign Exchange

We expect a muted USD reaction to this month’s retail sales reading as markets are likely to fade any disappointment seen at the headline level and focus on underlying strength. The USD has lost some momentum this week so any upside surprises may see this reverse, but follow-through may be limited amid the seasonal drop in market liquidity and trading activity.

For USDJPY, we are keeping an eye on support around 100.68 and 100.00. An unexpectedly robust report is likely to reinvigorate the USD uptrend, however, with GBPUSD as the path of least resistance from here.”