Retail Sales Stronger than Expected

STOCK INDEX FUTURES

Stock index futures are mixed with the S&P and Nasdaq leading gains while the Dow lagged following the release of upbeat retail sales data. Retail sales grew 0.6% in August, well above expectations of 0.2% growth while July’s figure was revised from 0.5% growth to 0.6%. Treasury Secretary Scott Bessent, who is leading the US delegation during ongoing talks with Chinese trade officials in Spain, reiterated on Tuesday that he expects a finalized TikTok deal to be announced after President Trump and Xi Jinping talk on Friday. Oracle is seen as the frontrunner in any deal involving American ownership of the app, leading shared to rise 5% in premarket trading. Bessent also noted that the US would not move forward with the oil-related tariffs on China over its purchases of Russian oil unless European countries did the same.

The main event of the week lands Wednesday when the Fed will announce its decision on rates. Markets are confident that the Fed will cut rates due to a slowdown in the labor market, despite higher inflation.

Elsewhere on the data front, the import and export price indexes for August both grew 0.3% during the month. Industrial production figures due later in the morning and are expected to show no change in growth. August housing starts on Wednesday and weekly jobless claims figures Thursday will round out the week.

CURRENCY FUTURES

The USD index slid to more than a two-month low as markets wait for Wednesday’s Fed meeting where expectations are cemented that the Fed will cut rates. Strong retail sales data did offer some support for the dollar although interest rate cut expectations will likely keep any upside limited. Markets will scrutinize the Fed’s updated “dot plot” projections for guidance and from remarks from Chair Powell for any signals on the possible pace and extent of further easing. Markets are pricing an 4% of a 50 bp cut and a 78% chance of an additional cut in October. Stephen Miran was confirmed by the Senate late Monday to the Federal Reserve Board in a tight vote. This puts him in place to vote at the Fed’s meeting on Wednesday, giving President Trump more of a print on the Fed. Markets will monitor whether Miran will vote for a 25 bp cut or favor a larger 50 bp rate cut. An appeals court on Monday rejected President Trump’s effort to fire Fed Governor Lisa Cook while she challenges the legality of the President’s move.

Euro futures are higher with the euro hovering at its highest level in four years following the release of economic data and a weaker dollar. Industrial production figures for the eurozone showed that output grew 0.3% on the month in July, after a 0.6% fall in June, although slightly below expectations of 0.4% growth. That increase was driven by a strong 1.5% upswing in production in Germany, historically the main driver of European industry. The strength in July’s industrial production was propelled by consumer goods, offsetting a decline in energy production, Eurostat said. In addition, German financial confidence grew in September, according to a monthly sentiment survey published by the ZEW economic-research institute that showed an index reading of 37.3, above an expected 25.3. European officials continue to emphasize caution on inflation. ECB Executive Board member Isabel Schnabel warned that risks ranging from tariffs and services inflation to food prices and fiscal policy remain significant while Slovak central-bank Governor Peter Kazimir echoed that view, cautioning that ignoring these risks would be a mistake. Last week, The European Central Bank signaled its rate-cutting cycle may be over, with President Lagarde noting growth risks are now more balanced, indicating a shift to a steadier policy stance. Looking ahead, second-estimate CPI inflation for August for the eurozone is due on Wednesday. Germany publishes producer price inflation data for August on Friday, while Spain releases industrial orders figures for July. Also on Friday, France’s monthly business survey for September is due, a key insight into businesses’ well-being in light of the recent change in government.

British pound futures are higher following the release of labor data that should keep the Bank of England on course to hold rates. The UK’s unemployment rate held steady at 4.7% in the three months to July, matching the previous three readings, while pay growth held steady. Wages plus bonuses grew 4.7% in July, a step above June’s 4.6% although wages excluding bonuses posted a 4.8% growth, below the previous reading of 5.0%. The BoE is expected to hold rates steady at its meeting on Thursday and markets will look for signals on when interest rates could fall again. Money markets only pricing in around a 36% chance of another rate cut in 2025. Markets expect that until inflation cools convincingly, the bank will be stuck holding rates high to keep pressure on price growth. The BoE is also expected to make a decision on quantitative tightening and to announce a reduction in the pace of sovereign-bond sales. August inflation figures Wednesday, will be heavily scrutinized ahead of the BoE’s policy announcement. UK retail sales and public finances data for August are due Friday, alongside the GfK consumer confidence indicator for September.

Japanese yen futures are higher on a weaker dollar, extending gains for a second session ahead of meeting from both the Fed and the Bank of Japan. The BoJ is expected to leave rates unchanged at 0.5% on Friday. Domestic political uncertainty remains elevated after Prime Minister Shigeru Ishiba resigned, fueling speculation that a new premier could favor easier monetary policy. Japan’s farm minister and the chief government spokesperson joined the race on Tuesday to lead the ruling party and replace outgoing Prime Minister Shigeru Ishiba. Economists expect that the central bank will resume rate hikes again soon as inflation remains sticky and headwinds from trade uncertainty with the US ease. Trade balance figures due Tuesday night will shed further clues on how the US-Japan trade agreement have impact exports out of the country. CPI figures due ahead of the BoJ’s policy announcement are expected to show prices having risen by 2.7% in August on an annualized basis, down from July’s 3.1%.

Australian dollar futures fell lower after the AUD climbed to its highest level since November 8. Markets will focus on the release of August employment data due Thursday amid concerns that the labor market may be slowing despite holding strong over recent months. Government hiring has been weakening, putting more pressure on the private sector to sustain job growth. Swaps imply little chance the RBA will cut rates at its meeting this month, while a cut in November, which was priced at 100%, is now priced at just 70%.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve, with a spike in selling following the release of strong retail sales data, which tempered some bets of a jumbo 50 bp rate cut from the Fed. Treasurys have largely pared losses since. Retail sales grew 0.6% in August, well above expectations of 0.2% growth. Import prices unexpectedly rose in August, signaling a potential pro-inflationary impact from tariffs. Markets remain fully priced in for a rate cut by the Fed tomorrow and are pricing in an 78% chance of an additional cut in October and a nearly 70% chance of another reduction in December. Traders will scrutinize the Summary of Economic Projections for hints on how the FOMC balances risks of stubborn inflation against increasing unemployment. Markets will watch for any signals on the possible pace and extent of further easing.

A federal appeals court on Monday night rejected an emergency Trump administration request to remove Federal Reserve Governor Lisa Cook ahead of the central bank’s next meeting. A divided three-judge panel in left in place a lower court injunction that blocked Cook’s termination while she challenges the legality of Trump’s move. The Senate confirmed President Trump’s pick, Stephen Miran, as a Federal Reserve board governor late Monday night, giving him the opportunity to offer a crucial vote at this week’s meeting. Markets will look to see if Miran votes for a regular 25 bp rate cut or a jumbo 50 bp cut for future signals on a dovish tilt from the Fed. Miran has said that he expects to return to his position as Chair of the White House Council of Economic Advisers after his term in over on January 31, 2026, prompting markets to be skeptical of the Fed’s true independence. If Miran votes against President Trump’s wishes, it is likely he will put his job at the White House at risk.

The spread between the two- and 10-year yields held steady at 51.2 bps from 51.1 bps on Monday.

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