Source: Wall Street See

As previously pointed out by Wall Street News, the downward trend of US inflation has been further established, and retail sales have been regarded by the market as a more important indicator than CPI during the time when the focus of the Federal Reserve has shifted from “anti-inflation” to “anti-recession”.

The US Census Bureau will release retail sales data for July on Thursday evening Beijing time. Wall Street expects:

Retail sales in July increased by 0.4% month-on-month, the highest growth rate since April this year, and remained flat month-on-month from the previous value;

After excluding auto sales, retail sales increased by 0.1%, which is lower than the previous value of 0.4%;

After excluding auto and RBOB gasoline sales, retail sales increased by 0.2%, significantly down from 0.8% in June.

Wall Street is generally optimistic about retail sales in June, and expects the resilience of consumption to support the Federal Reserve's opening of an interest rate cut cycle in September.

Bank of America: beware of seasonal disadvantages

In terms of leading indicators, Bank of America's credit card spending data has received much attention. The institution's report shows that the total card spending in July decreased by 0.4% year-on-year without adjustment, but increased by 0.3% month-on-month after seasonal adjustment. When this data is converted into retail data from the Census Bureau, retail sales in July (excluding cars) increased by 0.1%, consistent with the market consensus.

However, Bank of America's credit card spending data also shows some signs of weakness: core retail sales (excluding autos, gasoline, building materials and restaurants) are expected to remain flat month-on-month, for the first time in several months falling below the market's overall expectations.

As previously mentioned in Wall Street News, the credit card delinquency rate exceeded that of 2019 in the second quarter of the United States, with more than 10% of credit card debts overdue for more than 90 days.

Bank of America also warned that June retail data may have received a particularly favorable adjustment due to seasonal factors. However, since this type of seasonal adjustment is usually cyclical, there may be an opposite and unfavorable seasonal adjustment in July. This may lead to significant downward revisions of June data.

For example, Bank of America pointed out that the Prime Day promotion in July may have an impact on retail sales of online purchases (non-credit card consumption), but this impact may not be captured by seasonal adjustments.

What is the interest rate path in September?

After the release of the non-farm employment report in July, the market basically expects the Federal Reserve to cut interest rates by 50 basis points at the September meeting.

As of Thursday morning, the market still expected interest rates to be cut by more than 35 basis points in September, and interest rates to be cut by 100 basis points before the end of the year.

However, Bank of America believes that such expectations may be too aggressive, as the trajectory of retail sales growth points to an economic "soft landing". The pace of the Federal Reserve's interest rate cuts is expected to be slow and steady.

Bank of America predicts that the Federal Reserve will cut interest rates by 25 basis points every quarter from September onwards.

After the release of the CPI data in July, FOMC member and Atlanta Fed president Bostic, who is also a voting member this year, took a dovish stance, saying that considering the ongoing cooling of the labor market and the lag of central bank policies, the Federal Reserve cannot risk relaxing its policies too late and is "open" to a rate cut in September.

Compared with CPI, retail sales may have a greater market response

US July PPI has cooled down across the board, with service costs declining for the first time this year. CPI basically meets expectations, and the downward trend of inflation has been further established. However, a series of economic data such as the unemployment rate and the manufacturing PMI in July have signaled recession, and the market's focus has gradually shifted from "anti-inflation" to "anti-recession".

As a key indicator of consumer spending and overall economic activity strength, tonight's retail data will provide a clearer economic signal.

As macro volatility traders Shawn Tuteja previously stated:

The narrative has completely shifted to whether the slowdown in the economy is happening faster than the Fed’s reaction speed, and therefore (if the Fed is behind the curve?), we focus more on retail data (due Thursday) than this month CPI.

JPMorgan proposed a US stock reaction matrix prediction based on CPI and retail sales. Since the CPI data has been released and is basically consistent with expectations, there are only three combinations left:

CPI meets expectations and retail sales are hot: This scenario will support the rise of the US stock market, because core CPI year-on-year decline indicates strong consumers, economic growth without inflationary pressure. The expected S&P 500 index will rise, and the performance of the Nasdaq 100 index will be weaker than that of the Russell 2000 index.

CPI meets expectations and retail sales are flat: This is a benign result, showing that the economy is cooling down but still has resilience, and there is no new inflationary pressure. Expected overall increase in the stock market, and similar performance of the Nasdaq 100 index and the Russell 2000 index.

CPI meets expectations but retail sales are sluggish: The stock market's reaction will depend on the degree of decline in retail sales data. If retail sales are flat or negative growth, it will be particularly unfavorable to the stock market. The expected S&P 500 index will fall, and the performance of the Nasdaq 100 index will be better than that of the Russell 2000 index.

Editor / jayden