US retail calls Q2 GDP into question ahead of CPIs

• US retail sales grow by 0.4% in June, missing 0.8% estimate

• Rajoy denies wrongdoing, Greece holds general strike

• AUD flies as RBA deems rates ‘appropriate’

Yesterday was the prime example of a day beset by the summer lull. Despite an impact worthy piece of economic news emerging from the Far East – Chinese GDP in this case – traders were unwilling to rock the boat in low-liquidity conditions and not much happened.

We did see a slight reversal in prices following US retail sales yesterday afternoon. Dollar started the day strong with traders betting that the snapback following last week’s Fed minutes, Bernanke speech and initial jobless claims had been overdone. An element of dollar strength will have come from the Chinese GDP numbers as well; everyone wants to see the Fed withdraw stimulus and emerging market currencies continue to grow strongly.

US retail sales disappointed, however, with June’s number only half the 0.8% improvement that had been forecast. May’s number was also revised slightly lower to 0.5%. The fact that the 2nd quarter is now seen to have ended on a weak note and we have seen many bank’s analysts downgrade their growth estimates for the US economy as a whole. Goldman Sachs, Barclays and JP Morgan all downgraded to below or around the 1% mark compared to previous estimates of between 1.6% and 2%.

The USD slumped on the release as traders sat back and thought about tapering once again. The question is, will the Fed feel comfortable about slowing the rate of stimulus if GDP is so far below trend and inflation remains in the pit?

News from the Eurozone was also slim yesterday with the political stories of choice being advanced little.
Mariano Rajoy once again refuted anything to do with the Spanish payments scandal adding that he would see out his term in office and that the rate of reform would not be altered by the allegations. Protests remain a risk.

Strikes are taking place in Greece today with transport services, schools, hospitals and government offices on strike in protest of further public sector job cuts.

The fall-out from Friday’s rating downgrade by Fitch continued yesterday with the European Financial Stability Facility downgraded to AA+.

AUD has bounced back strongly overnight having hit the lowest level against USD since September 2010 on Friday. The Chinese growth story was the initial catalyst yesterday and hawkish minutes from the Reserve Bank of Australia overnight have extended these gains. The central bank told us that the fall in the AUD in recent months, combined with the past interest rate cuts meant that current interest rates were appropriate. While this does not completely rule out the prospect of a rate cut in the near-term, it does lessen the haste with which the bank is likely to act.

Today will be dominated by inflation numbers from the UK and US. We expect inflation to tip higher on the basis of the increase in oil prices and how they have been translated to the petrol pump. Whether the number spikes through the 3% level will remain to be seen but the Governor and the MPC will be counting on this being a near-term high. Likewise, we expect inflation in the US to move higher on gasoline prices but remain below the Fed’s 2% target.

Have a great day.

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