Interest rate cut expectations persists amidst strong U.S. retail sales

U.S. retail sales increased more than expected in June, pointing to strong consumer spending, however this did not change market expectations that the Federal Reserve will cut interest rates this month.

The report from the Commerce Department on Tuesday showed that consumer spending is on the rise and as such, could help to blunt some of the drag on the economy from weak business investment.

Signs of strong consumer spending and rising underlying inflation suggest the U.S. central bank is unlikely to cut rates by 50 basis points at its July 30-31 policy meeting as markets had initially anticipated.

Fed Chairman Jerome Powell last week told lawmakers the central bank would “act as appropriate” to protect the economy against risks stoked by a trade war between the United States and China, as well as slowing global growth.

“It certainly will counteract weak business spending to some degree,” said Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia. “Given that the Fed is most worried about foreign economies and the threat of an escalating trade war, it is unlikely to dissuade them from cutting rates soon.”

Retail sales increased 0.4 percent last month as households stepped up purchases of motor vehicles and a variety of other goods. Data for May was revised slightly down to show retail sales gaining 0.4 percent instead of rising 0.5 percent as previously reported.

Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.7 percent last month after an upwardly revised 0.6 percent increase in May. These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have increased by 0.4 percent in May.

June’s strong gain in core retail sales, coming on the heels of solid increases in April and May, suggested an acceleration in consumer spending in the second quarter. Consumer spending grew at its slowest pace in a year in the first quarter.