US Retail Sales Key as Fed Rate Hike Looms

U.S. indices are expected to open marginally higher on Thursday, tracking gains made in Europe as investors allow themselves to become a little more optimistic that a deal on Greece can be reached.

Reports yesterday suggested that Germany may be willing to consider a pay-per-reform deal in which Greece receives funds based on the reforms that it implements. I don’t think this really ticks the sustainability box but it appears to be where we’re at in the bailout, with Greece at tipping point and its creditors realizing the country may not be able to take much more.

This kind of deal would allow Greece to avoid defaulting on its debt at the end of the month as there are only a few issues that are stopping a full extension being agreed. In the eyes of S&P, the credit rating agency, Greece’s decision not to pay the International Monetary Fund last week and bundle together payments to the end of the month, was evidence that Greece is now prioritizing spending at home over repaying debts which contributed to it downgrading Greece to CCC from CCC+. There were other contributing factors including the fragile state of the country’s banks which are effectively on life support from the European Central Banks emergency liquidity assistance (ELA) program.

U.S. retail sales will attract a lot of attention today as investors look for evidence that a growing disposable income in the U.S. is going to be used to stimulate the economy and create inflation pressures. It has become apparent this year that the additional disposable income that Americans have generated as a result of falling oil prices has boosted saving rather than spending, as was expected.

It’s difficult to know exactly why this is, it may simply be that consumers didn’t see it lasting and were saving more in anticipation of future rises. They may also have been using them to fill the void left by low wage growth. Whatever the reason, the data from the last few months has shown wages rising, in May they rose to a two year high of 2.3%, so consumers may be more willing to spend their growing disposable income.

Moreover, a surge in retail hiring in May suggests that employers are either experiencing or anticipating higher spending which bodes well for the summer period. With wages now rising, and expected to accelerate as the year progresses, and the labour market looking far healthier, it’s surely only a matter of time until spending and inflation catches up. As soon as this happens, I think the Fed will look to raise interest rates.

A strong retail sales report in May could be the first step towards a rate hike in September, especially if the economy maintains stronger spending figures between now and that September Federal Reserve meeting. Retail sales are expected to rise by 1.1% in May, which would mark the second time in three months that sales have risen by more than 1%. While this partly reflects a lower base that sales are rising from following a disappointing winter period, it would also represent a strong rebound that is more representative of the consumer sentiment surveys that have been near all-time highs throughout that period.

Weekly jobless claims will also be released alongside the retail sales report and are again expected to be strong at 277,000.

The S&P is expected to open 2 points higher, the Dow 29 points higher and the Nasdaq 5 points higher.

For a look at all of today’s economic events, check out our economic calendar.

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