US retail sales drop fuels record Wall Street highs as global growth stalls
First decline in nine months tempers Fed rate hike expectations, while Japan’s borrowing costs surge and China’s economy loses momentum.
US retail sales fell in July, marking the first decline in nine months, a development that has significantly altered the outlook for Federal Reserve policy and supported record highs across Wall Street indexes. The drop, reported last Friday, was driven partly by a prior retreat in oil prices and Amazon moving its Prime Day discount event to June, creating a statistical quirk that exaggerated the monthly decline.
The retail sales data, combined with subdued inflation reports from earlier in the week, has reduced market expectations for a Federal Reserve interest rate hike in September. This shift in sentiment has provided enough relief to keep stock indexes pushing to record levels, despite underlying concerns about consumer spending. The University of Michigan’s latest survey also indicated a drop in consumer confidence, reinforcing the softer economic picture.
While the immediate rate relief has bolstered equities, the geopolitical landscape remains volatile. Oil prices have reheated in recent weeks due to an Iran war standoff, with attacks on vessels in the Gulf of Oman and the Red Sea fuelling fears of supply disruptions. President Donald Trump stated that slightly more expensive gas was a price worth paying for seeing the conflict out, though the Federal Reserve is due to release minutes from its split July policy meeting on Wednesday, which may clarify the central bank’s stance on these inflationary pressures.
In Asia, Japan’s 10-year government borrowing rates hit a three-decade high on Monday, even as the country’s second-quarter GDP growth came in at 1.1 per cent, well below forecasts. The Bank of Japan raised its benchmark interest rate to 1 per cent in June, the first hike since 2008, as it gradually moves away from ultra-loose monetary policy. Despite the sputtering growth, which was partly attributed to energy prices, the yen held firm against a broadly weaker dollar driven by the shifting Fed view.
China’s economy showed slowing momentum in the second half of the year, with industrial output and retail sales declining amid extreme weather disruptions and weak domestic demand. The property sector remains in a slump, with new home prices falling 3.2 per cent year-on-year and 0.1 per cent month-on-month in July. These factors are renewing pressure on policymakers to step up stimulus as the country attempts to encourage spending among its 1.4-billion-strong population.
Looking ahead, US markets will focus on second-quarter results from major retailers including Home Depot, Target, and Walmart later this week, which will serve as another gauge of consumer spending. Additionally, industrial production data is scheduled for release tomorrow, alongside the New York Fed manufacturing survey for August.
