Lackluster Retail Sales

MACRO FRAME

July’s inflation reports revealed that underlying price pressures remain, favoring a hawkish stance from the Fed even absent the geopolitical backdrop.

STOCK INDEX FUTURES

Equity index futures were mixed overnight. The S&P 500 closed at a new record on Thursday and is set for a third consecutive weekly gain; the Nasdaq is also on pace for a third weekly advance, supported by easier inflation readings and renewed AI optimism. This week’s CPI and PPI data were sufficient enough to lower expectations over September rate hike from the Fed, while Chicago Fed President Goolsbee described the latest inflation data as “a little better.” However, with Chair Warsh offering limited guidance, markets remain highly data-dependent; today’s University of Michigan sentiment survey will be watched for evidence on consumer resilience and inflation expectations. However, our view is that a September is hold is no more likely than a hike. July retail sales fell more than expected at -0.6% MoM, with the weakness concentrated in autos and non-store retailing. Autos and non-store retail tend to be more volatile, so the drop in the reading is not necessarily a signal of waning demand, non-store sales are coming off a +10.4% YoY gain, so July could prove to be a monthly reversal after months of heavy spending. However, a key watch point will be if autos and retail both continue their softness into August, which would offer more evidence of fading demand. For now, the report adds to market expectations that the Fed can keep rates steady in September.

Oil prices are little changed, the US reiterated that it could maintain its naval blockade of Iran indefinitely, while Iran has continued to challenge transit routes and shipping control in the strait. While investors may have become a bit desensitized to US-Iran headline, central banks cannot dismiss the risks of higher oil and shipping prices.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure amid the renewed fighting.

CURRENCIES

US DOLLAR: The USD index is sharply lower at 99.59. Today’s lackluster retail sales data is adding fresh pressure following the “benign” inflation readings this week, which have materially lowered market expectations of a September rate hike and reduced some near-term support. Still, while July’s inflation data saw traders push back expectations of a September rate hike, the reports did reveal that underlying inflationary pressures remained firm, which is likely to reinforce hawkish Fed members views that policy should move upwards, whether or not that is the case in September or October. As such, and given the lack of forward guidance from the Fed, a September rate hike remains firmly on the table. Meanwhile, ongoing uncertainty over US-Iran negotiations and Brent prices near $90bbl are likely to keep the dollar will bid.

Watch point: US inflation data shows underlying price pressures remaining firm, which does justify hawkish policymakers’ views that Fed policy should move upwards.

EURO: The euro gained 0.35% to $1.1567, its highest level since June 16 as US inflation data has tempered Fed hike expectations, while traders continued to increase expectations of a September ECB hike. That has narrowed the implicit year-end policy spread between the Fed and ECB in favor of the EUR. Money markets are pricing an 89% chance of a hike. ECB and Fed policy expectations will continue to play an outsized role in EUR price direction and fresh off today’s lackluster retail sales data, favors the upside for the EUR in the near-term. Traders are pricing around 37 bps of further ECB tightening this year.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which is likely to be favorable to the EUR in the near-term.

BRITISH POUND: Sterling is 0.38% higher at $1.3537, hitting its highest level since mid-June. Better than expected GDP data as well as relative stability across FX markets has proved supportive of the pound. GDP data shows that the UK economy is proving more resilient against the energy price shock than initially expected, though performance in the latter half of the year is uncertain. Carry trade has also been supportive of the pound against the EUR, with short-term borrowing costs in the UK remaining among some of the highest in DM. Still, while headline GDP is stronger-than-expected, it does not materially remove the case for a cautious BoE. Markets have shored up bets of tightening from the Bank of England in response though, now pricing in 26 bps of tightening by year-end, up from 24 bps ahead of the reports.

JAPANESE YEN: The yen gained 0.32% to 158.99 yen per dollar. Despite today’s gains, the yen has given back roughly half of its post-intervention rally. The US–Japan intervention succeeded in curbing disorderly moves, but it has not changed the fundamental drivers of yen weakness, wide rate differentials, Japan’s imported-energy exposure and concerns over fiscal credibility. The burden now shifts to the BoJ: markets are pricing a 66% chance of a September hike after the July meeting revealed a more hawkish debate, but a failure to validate those expectations could renew pressure on the currency.

Watch point: With the recent intervention in the currency, the yen will need strong monetary policy support from the Bank of Japan to prevent further depreciation.

AUSTRALIAN DOLLAR: The Aussie is 0.35% higher at $0.7079. Reserve Bank of Australia Assistant Governor Christopher Kent emphasized that inflation and rates were biased to the upside. The RBA held rates and retained a hawkish bias saying it stands willing to raise rates if inflation pressures do not subside. The board noted inflation was too high, though noted that the economy was slowing as expected in the face of tighter policy. Several banks are now expecting the central bank to remain on hold throughout the rest of the year, having already hiked three times this year. Investors are pricing an 16% chance of a hike in September. Markets imply around a 44% chance of a hike in December, and see 13 bps of tightening by year-end. The dovish element from the meeting came from the bank’s reference to falling house prices and weaker housing credit, which could potentially raise the bar for further tightening. Q3 inflation figures will serve an outsized role in determining whether or not the bank raises rates this year after second-quarter inflation came in below forecasts.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields are little changed across the curve in response to July’s retail sales data, which is likely to add to expectations that the Fed has more breathing room to hold rates steady heading into September’s meeting following this week’s inflation data. However, a weaker headline figure has masked some underlying pressures, while the backdrop of an unresolved Strait of Hormuz disruption leaves the risk that the energy could continue to feed into expectations. For rates, the reports are modestly dovish, as they supports the view that the energy-driven goods shock is unwinding/can unwind fast, but underlying inflation signals are still flashing, arguing against any near-term disinflation. For Fed policy, without any forward guidance, the September decision will likely remain a close call. Broadly, breakeven inflation remains well contained, suggesting that while underlying price pressures remain firm, markets continue to expect the Fed to ultimately bring inflation under control. That backdrop is mildly supportive for bonds over the medium term so long as inflation expectations remain anchored. However, corporate earnings are rising at a pace that has historically been associated with higher 10-year Treasury yields. Earnings strength can indicate demand resilience and nominal growth that is inconsistent with rapid disinflation. This creates an important cross-market tension: strong earnings are supportive for equities, but they can also sustain higher long-term rates and limit the scope for Fed easing. SocGen’s equity market inflation proxy, based on developed market stocks most correlated with inflation has outperformed over the past year, potentially signaling a path of higher rates and inflation ahead.

Watch point: Mainly, the prospect that inflation will remain sticky reinforces a hawkish backdrop for the Fed over the medium-term, while Friday’s report has raised concerns that a slow labor market may be emerging.

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