US Retail Sales Confirms 4% GDP Growth Is on the Cards

Central Bank

Economic

Summary:

A robust US retail sales report for September plus upward revisions to August's report reinforce the view that the US economy likely expanded at a 4% annualised rate in the third quarter. Headwinds are set to intensify, but for now the US consumer continues to defy the odds.

Strong sales underscores consumer resilience

The September US retails sales report was significantly better than expected, posting a month-on-month gain of 0.7% versus 0.3% expected while retail sales growth for August has also been revised higher to 0.8% from 0.6%. It is a dollar value figure and higher gasoline prices have helped, but not hugely so (gas station sales up 0.9% MoM). We knew auto volume sales were up healthily and this is reflected in a 1% MoM gain in autos and parts. Miscellaneous was where there was considerable strength, rising 3% MoM, but this is a volatile series having been down 3.6% in August and down 1.4% in July. Non-store retailers also had a good month with sales up 1.1%. Labor Day weekend discounts probably helped support activity here with excess inventory shifted out of warehouses.

US nominal retail sales levels versus 2020

US Retail Sales Confirms 4% GDP Growth Is on the Cards_1

With the control group also looking strong at 0.6% MoM and this sub-set historically moving more in line with broader consumer spending trends, it indicates we should be looking for third quarter GDP growth to be in the region of 4%. Coupled with the recent strong jobs numbers and hot inflation it is no surprise that Treasury yields push higher. While Fed officials may be coalescing around the view that further policy rate hikes may not be needed, the prospect of interest rate cuts is in the far-off future and the yield curve needs to continue repricing for that.

Data surprises keeps the upward pressure on borrowing costs

So why have economists got it so wrong, yet again? Well, the weakening trend we are seeing in consumer confidence is one factor as households continue to worry about the economic outlook and what might happen in the jobs market at a time when spending power is under pressure from lingering inflation. Another reason is that the Bureau of Economic Analysis now publishes weekly credit card spending transaction usage and this was down sharply in September. Given this is how most people typically spend money, especially on-line, this should give a good read through for general spending patterns. For auto sales it will obviously be different, but this discrepancy is surprising as it is doubtful we will all suddenly be using cash again.

Retail trade consumer credit card spending (week over week % change)

US Retail Sales Confirms 4% GDP Growth Is on the Cards_2

We continue to think that the constraints facing the household sector of falling real household disposable income, reduced credit availability, more and more households running down accrued pandemic era savings and the resumption of student loan repayments will eventually lead to weaker consumer spending numbers. It isn't happening yet though and will mean market rates continue to move higher with mortgage rates, car loans and credit card borrowing rates inevitably following suit, which will only add to the headwinds for consumer spending as we move into 2024.

Source: ING

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Thomas

Political

Palestinian-Israeli conflict

The decision by United States President Joe Biden to travel to Israel, announced early Tuesday (Oct 17), marks a surprising - and extremely fraught - turn in the deepening turmoil engulfing the Middle East.

Mr. Biden is no doubt making the trip to show that the U.S. stands shoulder to shoulder with Israel in the wake of Hamas' multi-pronged surprise attack on Oct 7, and to demonstrate American resolve to prevent opportunistic actors from widening the conflict.

But that is nothing that the deployment of two aircraft carrier strike groups to the eastern Mediterranean, shipments of U.S. weapons, and a frantic bout of shuttle diplomacy by Secretary of State Antony Blinken have not already done.

Instead, with a massive ground invasion of Gaza looming, the President's trip risks signalling American acquiescence with what is to come. Although Mr. Biden has warned that Israel would “make a big mistake” if it re-occupies Gaza, the world's focus has been shifting from the initial terrorist attack by Hamas and the retaliation by Israel to the widening humanitarian crisis in the Hamas-controlled Gaza - one that will worsen appreciably once the Israeli Defense Forces (IDF) move in.

Inconceivable That Israel Will Wait Much Longer to Invade Gaza

While there is little doubt that an invasion will be paused for at least as long as the U.S. leader is in the region, it is inconceivable that Israel will wait for very much longer. It has been clear that pressure by the U.S. and others has forced Prime Minister Benjamin Netanyahu's timelines for action to be delayed: On Oct 13, Israel gave over a million people 24 hours to evacuate from northern Gaza, but that deadline has been progressively shifted amid frantic efforts to open humanitarian corridors.

Once the invasion begins, however, such efforts will be forgotten. A likely lasting image will be that of Mr. Biden and Mr. Netanyahu conferring perhaps days before Israeli tanks grind through the warren that is Gaza, where the extremely dense urban environment, Hamas' defences, and the presence of those unable to evacuate will ensure a bloody campaign.

An American leader's visit to Israel now contrasts with the stance taken by its main rivals, China and Russia. Beijing has focused on the Palestinians in its responses to the terror attacks: Foreign Minister Wang Yi said last week that the “crux of the matter is that justice has not been done to the Palestinian people”. Russian leader Vladimir Putin, meanwhile, has compared what is happening in Gaza to the siege of Leningrad by the Nazis during World War II, surely an affront to Israelis. Both are taking advantage of events to undermine the U.S..

Scoring Personal Political Points

At this stage, it is hard to see what Mr. Biden can gain from visiting the region, apart from perhaps some domestic political capital: His presumptive challenger for the presidency in 2024, Donald Trump, has not endeared himself to the American public by describing Hamas as “smart”. In a country where full-throated support for Israel is a bedrock political stance, Mr. Biden stands to pick up some points.

Perhaps the hope is that by looking Mr. Netanyahu in the eye, he can force the Israeli leader to exercise some restraint and avoid piling more misery on Palestinians. Given the current climate in Israel however, with the country reeling, growing frustration with the government's failure to prevent the attacks, and the ground conditions, that appears a long shot.

Source: CNA

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Devin

Central Bank

Economic

Communication following the ECB's September meeting had already given clear indications that the October meeting would be an intermediate one, waiting for new information from the Bank Lending Survey, GDP growth in the third quarter and a new round of staff projections – all of which will only be available at the December meeting and not yet next week.

Even if they are off recent peaks again, surging bond yields have strengthened the transmission of the ECB's monetary policy tightening so far and recent events in Israel have increased geopolitical tensions and uncertainties. We expect the ECB to keep rates on hold next week and to basically stick to a hawkish bias, keeping the door open to yet another rate hike in December.

Recent developments have put the ECB in an even more difficult position

As much as the ECB has tried to keep the door to further rate hikes open since the September decision, recent developments have clearly complicated this position. While the conflict in Israel and the Middle East – as well as the rise in bond yields – will further dampen eurozone growth prospects, the surge in oil prices will put new upward pressure on inflation and could make reaching the 2% target at the end of 2025 more unlikely.

The ECB's September staff projections were based on the technical assumption of an average oil price of $82/bbl in 2024. If oil prices were to average $95/bbl next year, this would probably push up the ECB's inflation forecasts to 3.3% for 2024 (from 3.2%) and more importantly to 2.4% in 2025 (from 2.1%). As a result, the return to 2% would be delayed to 2026.

Prior to the pandemic, most central banks would probably have looked past surging oil prices. Some even considered rising oil prices to eventually be deflationary, undermining purchasing power and industrial competitiveness. However, as we are no longer in the pre-pandemic era but now in the era of stickier-than-expected inflation, the ECB could still be tempted to choose its own credibility over a potential recession in the eurozone and opt for yet another rate hike in December if the inflation outlook worsens further.

Other monetary policy tools

At next week's meeting, the ECB won't be in any rush to take further action. Instead, it will use a welcome pause to wait for more data points on the delayed impact of the rate hikes so far and developments in the oil price. We expect the ECB to have a discussion on non-interest rate monetary policy instruments, i.e., minimum reserves, reversed tiering and a possible earlier unwinding of the reinvestment of bond purchases under the Pandemic Emergency Purchase Programme (PEPP).

Currently, these reinvestments are set to last at least until the end of 2024. The surge in bond yields, combined with new debt sustainability concerns in the eurozone, will make it harder for the ECB to eventually agree on an apparently envisaged earlier end. More broadly speaking, none of the discussions will be conclusive, but they will set the scene for the December meeting. The other big discussion on the review of the ECB's operational framework seems to take a bit longer and could be postponed until spring next year.

Good moment to pause

We still expect a further worsening of the economic outlook until the ECB's December meeting, strong enough not to continue hiking rates. However, with the latest surge in oil prices and consequently an upward revision of the inflation trajectory in the eurozone for 2024, we cannot entirely exclude that the ECB would still opt for yet another rate hike in December – not that it would help anything other than the ECB's own reputation. But this is a discussion for December, and not for next week. With all the new uncertainties, there hasn't been a better moment in the last 16 months for the ECB to take a pause than now.

Source: ING

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SAXO

Forex

USD: US retail sales and Fed speak on watch

The safe haven bid retreated on Monday with a diplomatic push to contain the spread of the Middle East conflict. Dollar slipped but the DXY index stays above the key 106 mark, and further bouts of risk aversion cannot be ruled out despite US efforts to prevent Iran or Hezbollah from opening a new front in the Israel-Hamas conflict. Warnings from Iran, however, have continued, and nothing seems to have changed on the ground. In fact, the reversals on Monday in safe-haven assets remained rather shallow, suggesting only a non-materialization of the worst-case scenario rather than any improvements in the base case.

The US dollar could still remain supported on Fed's higher-for-longer as well as the geopolitical risk premium. US data focus has shifted away from inflation to growth lately, and that makes retail sales out today a key metric to watch. Retail sales is expected to rise 0.3% MoM in September, cooling from the 0.6% pace in August, while the core measure (ex-auto) is seen rising 0.2% MoM, and also slowing from 0.6% previously. There are risks that numbers could come in softer given the recent rise in credit card delinquencies and restart of student loan repayments. Still, the labor market continues to hold up for now and that could have supported consumer spending. A retail sale print away from consensus could be key for short-end US yields, but it remains hard to see a significant downside for the USD even in the event of a softer print given the geopolitical overhang.

USD Safety Bid to Be Tested by Retail Sales and Fedspeak_2

What has also been a key driver for the US dollar just before the geopolitical tensions flared up last weekend was the Fed speak turning less hawkish. Many Fed speakers started to hint that the rise in long-end bond yields could substitute as a Fed rate hike, and markets had priced out the odds of another rate hike from the Fed for this year to less than 30% before a hot CPI brought it back to around 35% again. We get a lot more Fedspeak this week before the quiet period ahead of the next Fed meeting kicks off. Williams and Kashkari will be speaking today, but Waller (usually a hawk) could be key tomorrow. Focus will be on Chair Powell on Thursday who is yet to confirm if he agrees with the view that the rise in long-end yields could mean that the Fed may not have to hike more. This, while unlikely, could bring dollar back below 106. Powell is more likely to stay neutral in light of the geopolitical uncertainty.

Market Takeaway: Dollar could remain supported as geopolitical risks remain, and DXY index could re-test early Oct highs of 107.35 if there were any risks of the conflict escalating. However, retail sales and Fedspeak this week could test the dollar's safety bid.

AUDNZD: Diverging inflation trends?

New Zealand's Q3 CPI came-in below expectations today at 5.6% YoY, down from 6.0% YoY prior and 5.9% expected. This was also lower than RBNZ's projection of 6.0%. Falling inflation could provide comfort to RBNZ, and probability of another rate hike by the end of the year dropped from over 30% to 10%. NZDUSD reversed the post-election gains from yesterday to come back and test 0.59 handle, which has held up for now despite several tests since August.

Meanwhile, a slightly hawkish tone in RBA minutes lifted AUDUSD. The minutes suggested that a 25bps rate hike was considered at the October meeting, and there a "low tolerance" for slow return of inflation to target. Australia's Q3 CPI is due on October 25, and an upside surprise could further fuel higher-for-longer. AUD traders are also likely to have an eye on China's GDP data due tomorrow. Consensus expects China GDP to come in at 4.5% YoY from 6.3% previously, particularly with improvements in monthly retail sales growth print. If tomorrow's numbers could confirm a bottoming of Chinese economy, that could push up AUD further this week. However, China concerns will continue to underpin a more cautious reaction, and the trade terms still suggest downside in AUDNZD which has been range-bound this year.

Market Takeaway: Scope of increasing rate hike pricing could bring AUDNZD higher, but the bar to hike rates remain very high for both RBA and RBNZ. A break of 1.10 may be needed to confirm an upside trend.

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Economic

Commodity

Forex

Mood improves on diplomacy hopes

Risk sentiment was notably more buoyant on Tuesday as fears about the unfolding situation in Israel and Gaza developing into a wider conflict ebbed somewhat. A rush of diplomacy by global leaders to defuse the crisis appears to have soothed investor nerves for now, easing demand for safe havens such as gold.

US President Joe Biden is set to visit Israel on Wednesday in a show of solidarity to the country, while Secretary of State Antony Blinken made his second visit in as many days, underscoring the intense diplomatic efforts to contain the conflict and prevent a humanitarian catastrophe in Gaza.

Stocks lifted by earnings hopes and easing ME tensions

The geopolitical uncertainty couldn’t have come at a worse time for equities, which are already grappling with decade-high bond yields. Central banks led by the Fed have been flying the ‘higher for longer’ flag in recent months, dashing hopes that interest rates would be slashed soon now that inflation is on its way down.

If there is a silver lining from the tensions in the Middle East it is that the flight to safety boosted sovereign bonds, pushing yields lower. But that trend appears to be reversing as the initial panic subsides and the 10-year US Treasury yield is back in the 4.75% range today.

Nevertheless, optimism about the Q3 earnings season is rekindling the bulls after the big Wall Street banks that have reported so far all posted better-than-expected results. Bank of America and Goldman Sachs will be next to report today before the market close, although the real test for the markets will come tomorrow when Netflix and Tesla kick off the tech earnings.

European and Asian markets opened in positive territory on Tuesday after the S&P 500 and Nasdaq notched up gains of 1% yesterday.

Gold resists a sharp pullback

Gold remained under pressure for a second day as jitters about the latest violence between Israelis and Palestinians faded, albeit slightly. The precious metal staged a more than 5% rally over the past week, peaking above $1,930/oz on Friday. It has since eased to around $1,920 but there seems to be some pushback against a steeper retreat amid the volatile nature of this conflict that’s keeping investors on alert.

Oil prices also seem to have found support, with WTI futures attempting to reclaim the $90 a barrel level.

Dollar holds its ground as rivals struggle

The US dollar is similarly not ready to give up all of its safe-haven-led gains and is clawing back some of yesterday’s losses. However, the greenback’s strength today is mainly built on the ongoing weakness in the euro and pound, with the latter taking a knock from softer-than-expected wage growth data out of the UK.

US retail sales will come under the spotlight later today as well as speeches from Fed officials, including Williams, Bowman and Kashkari.

Expectations for a 25-bps rate hike by January have edged up slightly in the past 24 hours despite a growing number of Fed officials arguing against further tightening in recent days. It’s likely that there’s some reluctance in the markets to completely price out a further rate increase until Fed Chair Powell gives his blessing to a permanent pause. Powell is due to speak on Thursday.

The Australian dollar was the best performer on Tuesday even though it was unable to hold onto its earlier gains to turn flat by mid-European session. The aussie was boosted from the minutes of the RBA’s October meeting, which once again revealed that the decision to keep rates on hold was a close one.

In contrast, the New Zealand dollar was the worst performing major as the currency came under pressure from lower-than-expected CPI numbers for the third quarter.

To stay updated on all economic events of today, please check out our Economic calendar

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Swissquote

Palestinian-Israeli conflict

Stocks

Commodity

Stocks gained, and bonds fell yesterday on U.S. and allies' efforts to deescalate tensions in the Middle East. Yet Israel told the U.S. 'to embrace for a long war'.

We know that no matter how bad the situation gets in the Middle East, the way, and the intensity with which the market perceives the news will gradually decrease, and risk assets like gold and Swiss franc will eventually give back gains. But, right now, it is still too early to lower one's guard, as Israel hasn't said its last word yet. The risk of an Israeli offensive remains high, and there is a strong possibility of a sharp decline in appetite if diplomatic efforts fail.

From a price perspective, gold remains in ambush a touch lower than its 200-DMA and could rapidly jump to and above the $2000 per ounce mark in case of further bad news from the Middle East. The U.S. 10-year yield could quickly snap back to 4.50%, and oil could hop. Yesterday, the overall market relief led oil prices lower. News that the U.S. and Venezuela are set to resume talks with a strong potential for Biden administration to ease sanctions against the Venezuelan oil helped. But upside risks prevail. Iranian implication in tensions could send the barrel of oil above $100pb.

A risky place

The Gaza situation is not helping to improve relations between the U.S. and China since China picked the Palestinian side in the conflict. Therefore, it's little surprising that the U.S. considers further curbs on China's access to advanced semiconductors, or to machines that build the advanced semiconductors, if nothing, to make sure that China doesn't get the cutting-edge technology available for its military. Nvidia gained yesterday despite the news, but chip stocks are a risky place, not only due to a potentially escalating chip war between the U.S. and China, but also because, Israel plays an important role in the production of advanced chips, and tensions in Israel could further disturb the global supply chain for chips.

Data watch: Strong U.S. Retail Sales could boost appetite if Fed rate expectations remain contained

A potential return to low-risk assets could boost demand in U.S. sovereigns in the short run, but the faith of U.S. bonds is also tied to the economic data and what the Federal Reserve (Fed) will, or will not do in the coming meetings in the context of its own war against inflation. It's clear that a further escalation of tensions in Gaza, and a sustainable positive pressure in oil prices should boost inflation expectations and fuel rate hike bets for the year end. However, no more hike remains the base case scenario for now.

On the data front, the Empire Manufacturing index showed a slower-than-expected contraction in October, and the retail sales data for September will be released today. The number could be a strong one, given that September tends to be a good month for spending as children return to school. A strong data could fuel optimism if Fed speakers continue to hint at the end of monetary policy tightening. Note that strong U.S. spending has been one major pillar that explains why the U.S. economy remained so resilient to the Fed's aggressive tightening campaign. But behind the curtains, we see important vulnerability. The IMF data shows that unlike some European nations including Germany, France and the UK, the American savings took a very severe dive to pre-pandemic levels. And now that money is becoming rare, spending should slow, and help the Fed keep inflation on track towards its 2% target.

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Economic

The UK unemployment rate

The market was expecting a UK unemployment rate this morning, but it wasn't released. Only wage growth came through which excludes bonuses, average hourly earnings rose 7.8% year-over-year (YoY), in line with expectations.

Reserve Bank of Australia

This is marginally down from the 7.9% rise last month, but still very high and raises questions on whether the UK government's consumer price index (CPI) target of 5% by year-end will be reached. Earlier in Australia, the Reserve Bank of Australia (RBA) Board remains concerned that inflation is not slowing as hoped, according to the RBA minutes, but at the same time considers there is not enough new information to warrant a rate hike. More would be available for the November meeting.

Figures on employment for September are due later this week, while the key inflation report for the third quarter is out on Oct. 25. New Zealand's inflation rate in the three months to September fell to 5.6%, a two-year low, from 6% in the second quarter. Economists expected 5.9%, while the Reserve Bank had forecast 6%. Consumer prices in September advanced 1.8% from three months earlier, less than the 1.9% median estimate.

The ZEW economic sentiment

In Germany, the ZEW economic sentiment is expected to rise to -9 in October after -11.4 in September. Over in the US, a few macroeconomic indicators are scheduled for this afternoon. Retail sales are expected to rise by 0.3% in the September month-over-month (MOM). Industrial production is forecast to stay unchanged in the September MOM. Business inventories are seen increasing by 0.3% in August.

Rio Tinto

Rio Tinto shares rose in Australia overnight as the miner reported an increase in its output across its portfolios. Iron ore shipment rose 1.2% in the third quarter as it ramped up production at the Gudai-Darri mine. It shipped 83.9 million metric tonnes of iron ore from Pilbara, compared with 82.9 million metric tonnes a year earlier. Rio maintains its full-year expectations for Pilbara shipments in the upper half of the 320 million to 335 million metric tonnes range. Copper output increased by 5%, and aluminium output rose by 9%.

Rolls Royce

Rolls-Royce has confirmed its plans to cut about 2,500 white-collar jobs as part of a major restructuring of the UK aerospace and defence company by its new chief executive, aimed at streamlining operations and boosting returns.

Bellway

Bellway said that customer demand continues to be affected by mortgage affordability constraints. The reservation rate has been reduced by 28.4%. This announcement came as Bellway reported full-year earnings. Underlying pretax profit fell 18% to £532.6 million. Bellway warned that given the reduction of its order book and lower reservation rates, there will be a'material' reduction in volume output this current year.

Bank of America and Goldman Sachs earnings

Over in the US, the street awaits Bank of America and Goldman earnings. Also before the US opening bell, Johnson & Johnson is expected to post a year-on-year decline in earnings and revenue. Earnings are seen falling 1.3% to $2.51 per share. Revenue is anticipated to reach $21.04 billion, down from $23.79 billion a year ago, as coronavirus cases and deaths have continued to wane. This report will be the first after the completion of the spinoff of its consumer health business, now called Kenvue.

Bitcoin

Bitcoin prices had a volatile day yesterday as cryptocurrency news platform Cointelegraph reported that the iShares Bitcoin ETF (BlackRock Group) had been approved. The news saw Bitcoin spike to a session high of $29900 while simultaneously dragging the crypto markets as a whole higher. On the stock market, Coinbase Global rose 2.4%, and crypto miners Marathon Digital and Riot Blockchain were up 5% and 3%, respectively.

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