Retail Sales Eyed as September Hike Put in Doubt

Investors will look to a batch of US economic data on Thursday as they try to determine when exactly the Federal Reserve will look to raise interest rates.

A number of things have cast doubts on the Fed’s intention to raise rates this year with the latest being the devaluation of the Chinese Yuan by the People’s Bank of China. The devaluation will effectively export deflation to the U.S. at a time when price pressures are already lacking.

The amount of deflation exported to the U.S. will depend on just how much the Yuan depreciates but the PBOC appear pretty insistent that devaluation isn’t the intention here. In fact, it is believed that large state backed banks were asked to sell the dollar on Wednesday in order to halt the decline in the Yuan.

With the next FOMC meeting now only a little over a month away, policy makers may opt to see how the Yuan move pans out before moving forward with a rate hike. There was already plenty of opposition to a September rate hike prior to this because of the lack of inflation in the economy, this has just made the decision even harder. The Fed will have to be pretty convinced that there will be no knock-on effects of the Yuan move to push on with a September rate hike at this stage.

The issue that the Fed faces is that there has been growing evidence of subdued inflationary pressures of late. The employment cost index was the biggest shock, showing costs per head rising by only 0.2% in the second quarter, the lowest since 1982. It appears companies are suppressing wages in order to keep prices down and cope with the negative implications of a stronger dollar.

Retail sales have been quite disappointing for most of the year despite consumers being better off as a result of lower oil prices. Low wage growth and low consumer spending doesn’t bode well for the inflation outlook, although again, the Fed has been willing to overlook this until now on the believe that it is only temporary. Whether it can continue to do so with the latest data in mind isn’t clear.

Retail sales in July are expected to have risen by 0.5% which when taken in isolation isn’t a bad reading but when you consider it’s only the third positive sales reading this year, it doesn’t exactly suggest the economy is booming. Another weak reading today could well be the final nail in the coffin for September, although there are plenty out there that already think that ship has sailed. I remain confident that a rate hike will come this year although given the current situation with the Yuan, December is suddenly looking the more likely.

The S&P is expected to open 6 points higher, the Dow 41 points higher and the Nasdaq 22 points higher.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.