US retail sales data to show economy still growing

OVERNIGHT

Asia-Pacific stock market performance is mixed this morning. Concerns about the Chinese economic growth are generally to the fore but despite that some markets still managed to post gains. China has announced an 11-point plan to boost consumer spending but have not as yet given any details on its size. The minutes of the recent Australian central bank meeting show that another interest rate hike was seriously considered and remains a significant possibility for upcoming meetings.   

THE DAY AHEAD

So far this year, the US economy has confounded expectations that it will go into a recession. GDP grew in Q1 and seems likely to have done so again in Q2. The first estimate of Q2 GDP in the US will be released next week but ahead of that June updates for retail sales and industrial production and the May estimate for business inventories will provide indications on the likely outturn.

So far this year, US retail sales and consumer spending as a whole have risen by more than expected despite ongoing headwinds from higher interest rates and inflation. We forecast that to have remained the case in June pointing to another positive contribution to Q2 GDP growth from consumer spending. Whether that remains the case in the second half of 2023 is one of the key uncertainties for the economic outlook. 

Meanwhile, given reports that manufacturing is struggling, both in the US and elsewhere, the official industrial production measure has arguably been stronger than expected this year and certainly better than unofficial sources such as the ISM surveys suggest. We predict there will have been another small rise in output in June. One thing that might be lending support to the sector are the incentives now been given in the US to encourage ‘green’ investment.

Early Wednesday’s release of the latest UK inflation update seems likely to be seen as the key event of the week at least by UK markets. It is forecast to show annual CPI inflation down to 8.2% in June from 8.7% in May. That welcome development reflects an easing of some international pressures, notably energy prices. 

However, inflation is still predicted to be well in excess of the current levels in the US or the Eurozone and that outturn would be above the BoE’s previous expectation for June of 7.9%. Moreover, the news on ‘core’ inflation could be disappointing as we forecast a third successive rise (to 7.2% from 7.1% in May). In all, it is hard to see the report easing market expectations for UK interest rates to rise considerably further. 

MARKETS

US Treasury bond yields fell again yesterday as markets remain hopeful that US interest rates are close to a peak. UK gilt yields also fell slightly ahead of tomorrow’s important inflation data. In currency markets, the US dollar remained under pressure against both the euro and sterling.