Over the last month, traders have seen some signs that the US economy saw a “spring thaw” in May, especially in the labor market, but the stubbornly missing ingredient has been the US consumer. That changed this morning as lagging retail sector finally decided to hop on the Q2 US economic acceleration bandwagon.
The May Retail Sales report showed a 1.2% m/m increase in consumer spending in May, slightly above the 1.1% m/m reading expected. More to the point, the Core Retail Sales measure, which filters out the volatile impact of automobile purchases, rose at a similarly strong 1.0% m/m rate (vs. 0.7% m/m eyed). With US consumer finally loosening his tight hold on the purse strings, the Federal Reserve should have a more optimistic outlook on the economy heading into next week’s suddenly-relevant policy meeting. While there’s still essentially zero chance that the Fed will act by raising rates next week, it could now look to set the stage for a potential September rate hike with a more hawkish statement next week. Simultaneously, traders were treated another strong initial jobless claims report, with the volatile weekly measure showing an as-expected 279k new unemployed Americans in the last week.
The market reaction to today’s strong US data has been relatively limited, and if anything, counter-intuitive. After an initial spike higher, the US dollar is now trading lower against all of its major rivals: EURUSD peeked below 1.1200 before recovering back to 1.1260 as of writing, USDJPY spiked to 124.00 but is now back down to 123.40, and the beleaguered NZDUSD has managed to recover back above .7000 in the wake of the release. In other markets, US equities are still pointing a modestly higher open, while the benchmark 10-year treasury yield has shed 6bps back down to 2.43%.
While the initial “buy the rumor, sell the news” reaction should be respected, we’re unlikely to see prolonged weakness in the US dollar on the back of the solid retail sales data.