Upcoming US Retail Sales Report Unlikely to Deter the Fed from Aggressive Tightening

Key Points

• US Retail Sales data for August is set for release at 1230GMT on Thursday.
• Headline sales are seen rising 0.2% MoM and 0.1% when adjusted for August’s MoM headline CPI reading.
• While a weak report is unlikely to deter the Fed from aggressive tightening, a strong report could bolster their confidence.

US Markets Gearing Up For August Retail Sales Figures

US market participants reorientate their focus away from inflation and onto the health of the US consumer on Thursday, with the US Census Bureau set to release US Retail Sales figures for August at 1230GMT.

Nominal headline retail sales are seen rising 0.2% MoM, which would mark an inflation-adjusted gain of 0.1% on the month (when adjusted for August’s 0.1% gain in the headline Consumer Price Index, as data on Tuesday showed). That would come after retail sales enjoyed a 0.8% inflation-adjusted gain in July. Nominal core retail sales are seen rising at a MoM pace of 0.1% in August, a deceleration from July’s 0.4% pace of growth.

A rapid drop in gas prices in recent months is for now cushioning the US consumer from inflationary pressures that are hitting from other angles (such as still elevated rent and food price growth). Other sources of US economic strength, such as the still historically strong jobs market, are also helping.

But many analysts don’t expect this resilience to continue. “We maintain a weak outlook for real goods demand over the next few quarters,” Credit Suisse argued in a note last week. The Swiss bank added that “sentiment is sour and financial conditions are tightening along the Fed’s explicit policy goal of slowing growth”. This “may put the US into a broader, unemployment-led slowdown, keeping risks to spending skewed to the downside,” they argue.

How the Retail Sales Report Could Impact Fed Tightening Expectations

The data will be viewed in the context of if/how it might impact expectations about the outlook for Fed monetary tightening. On Tuesday, US Consumer Price Index (CPI) figures for August showed a surprisingly large uptick in core inflationary pressures, rattling equity markets and forcing money market traders to price in an additional 25 bps in Fed rate hikes by the end of the year.

Fed funds futures currently imply the Fed funds rate hitting 4.0% by the years end, versus under 3.8% prior to the CPI, before rising to 4.35% by the end of Q1 2023. Prior to the CPI data, rates were seen peaking around 4.0% at the end of Q1 2023. PPI data on Wednesday also showed a pick-up in August core price pressures.

In light of this week’s inflation data, which has been interpreted as likely to strengthen the Fed’s resolve to continue with aggressive rate hikes, it seems unlikely that Thursday’s retail sales report could push back against the market’s hawkish Fed pricing. Afterall, the Fed has explicitly said that it is willing to look past some economic weakness if that means getting inflation back to target.

Even if Thursday’s Retail Sales data is super weak, traders shouldn’t expect that all of the sudden the Fed is suddenly going to come to the rescue when they are so focused on the apparently still worsening inflation outlook. On the other hand, another stronger than expected report could boost the Fed’s confidence that the economy, which also still boasts a historically robust labor market, can “handle” aggressive tightening.

Data Dump

A dump of other tier 2 US data reports are also released alongside the US Retail Sales report on Thursday. At 1230GMT, the weekly jobless claims report is out alongside the Import and Export Price Indices for August, and the New York and Philadelphia Fed Manufacturing surveys for September. These reports will give a timely update as to the health of the US industrial sector ahead of the release of more widely followed US Markit and ISM Manufacturing PMI reports for September in the coming weeks.