US retail sales and inflation continue upbeat theme in June - ING

Rob Carnell, Chief International Economist at ING, suggests that stronger than expected retail sales and satisfactory inflation data suggest markets are still too pessimistic about the pace of Fed tightening

Key Quotes

“Markets have virtually no tightening by the Fed priced in until late 2017, but following on from the strong recent labour market report, the latest US data indicate that there is nothing much wrong with either US growth, and few reasons for concern about inflation either.

Retail sales put in a good +0.6% MoM gain in June, which despite some downward revisions to the previous months' data still leave sales stronger than anticipated. There was also strong growth in the numerous core measures of retail sales, including the control group, which has grown at a 0.5% MoM rate for two consecutive months now and grew by more than 1.0% MoM in April. This looks like it could be a bumper quarter for consumer spending, and may lead us to revise our GDP forecasts for 2Q16 higher.

But there was also some reasonable news on inflation. Although the headline measure of CPI inflation remained 1.0%YoY, against expectations for a small uptick, core inflation rose from 2.2% to 2.3%YoY - a good indicator of where headline inflation will be heading in coming quarters.

That said, markets seem in a wait-and-see mode following the UK Brexit vote, and the Fed seems in no hurry to disappoint them by doing anything radical. So we don't see this data having much effect on markets expectations. But the evidence is mounting that the pessimism on the US economy and the Fed in particular is overdone, and a market rethink cannot be too far away.”