U.S. retail sales increased 0.6 percent in July from the previous month. What does it imply for the Fed’s policy and the gold market?
According to the Department of Commerce, American retail sales rose a seasonally adjusted 0.6 percent last month, or 0.4 percent excluding the automotive sector. The number beat the expectations and there were also some upward revisions. For June, sales were revised up from a decline of 0.3 percent to unchanged, while May sales were also positively altered. Although retail sales were driven once again by the automotive industry, they rose in most areas. Thus, the data gave more ammunition to hawks at the Federal Reserve who want to raise interest rates this year.
However, the September hike is not certain. This is because the prices the U.S. paid for imported goods fell 0.9 percent in July, the biggest drop in six months. And the recent yuan devaluation may strengthen the U.S. dollar, lowering even further the import prices and the inflation rate. Another reason to worry is the rise in total business inventories. They increased 0.8 percent in June, the biggest gain since January 2013. The inventory-to-sales ratio rose from a recessionary 1.36 to an even more recessionary 1.37.
On the other hand, industrial production climbed 0.6 percent in July, driven by the increased production of autos (excluding the 10.6 percent surge in autos, manufacturing production rose 0.1 percent), according to the Federal Reserve. The capacity utilization for the industrial sector increased 0.3 percentage point to 78 percent; however, it still remained 2.1 percentage points below its long-term average.
Interestingly, despite solid retail sales, the Atlanta Fed GDPNow Forecast for the third quarter stands at 0.7 percent, down from the initial reading of 0.9 percent on August 6. Thus, the average growth through three quarters is estimated at 1.2 percent. Not a very impressive result.
The bottom line is that July retail sales should strengthen the case for a Fed’s interest rate hike this year, maybe as early as September. Yes, the inflation rate is stubbornly low (which is very good for consumers, of course), however, the U.S. central bank sees it as a transitory factor. It is possible that Fed will also see the yuan devaluation as a transitory factor. Thus, July retail sales are bad news for the gold market in the short term. However, the negative sentiment towards the gold (sustained by expectations of a monetary tightening) may be eased after the announcement.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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