Retail Sales Growth Steadies

STOCK INDEX FUTURES

Stock index futures are mixed, with the Dow leading gains as fresh retail sales data came in just below expectations, although down from June’s 0.9% growth,  spending has potentially steadied after the dramatic drop in April and May. Retail sales grew 0.5% in July, just below economist estimates of 0.6% growth. Investors remain cautious ahead of further data later today after Thursday’s PPI data showed a sharp rise in services prices, especially trade margins, a key inflationary signal. The inflation shock sapped enthusiasm in the markets, as it is likely to complicate the Fed’s decision in September and beyond.

Weekly jobless claims came in just below expectations per data on Thursday, although the previous week’s figure was revised slightly higher. Jobless claims came in at 224,000, below expectations of 225,000, while last week’s figure of 226,000 was revised higher to 227,000. Jobless claims will likely get more attention than normal given the economic backdrop, as eyes continue to stay peeled to labor data after the previous jobs report showed a sharp deterioration in labor market conditions.

Market attention will also be focused on Friday’s meeting between President Trump and Vladimir Putin regarding the war in Ukraine. Industrial production figures are out later in the morning, followed by the Michigan consumer sentiment and inflation expectation surveys.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve, as the Treasurys continue their declines from Thursday. The import price index rose 0.4% in July, signaling that companies are facing higher costs from tariffs as their goods arrive in the US. If import prices continue to rise, companies in the US are left with two options: absorb the costs and take a hit to profit margins, or pass the costs onto consumers. Companies are likely to do a bit of both as they navigate a competitive price landscape, although given the recent PPI data, inflationary effects from tariffs are likely to find their way to the consumer one way or the other.

July’s PPI data suggests that businesses are not fully absorbing the higher costs from tariffs, as some had initially speculated after a modest July CPI print. In fact, the data points to evidence that the prices of several durable goods are being passed through to consumers. In a broader sense, expect inflation to continue to find its way into further data releases; final demand prices rose 0.9% month-over-month and 3.3% year-over-year. This marks the strongest annual increase since February and reflects broad-based price pressures, especially in services. Final demand services accounted for over 75% of the overall increase in PPI inflation, with services prices rising 1.1% in July.

Given that the US is a majority services-based economy and that services inflation tends to be sticky, it is likely that the increase in producer services prices will find their way to the consumer throughout the end of the summer and into the fall. Core PPI inflation also rose substantially, 0.9% on the month, the largest monthly gain in over three years, resulting in an annualized rate of 3.7%, which marked the strongest annual increase since February. The uptick in core prices also suggests that underlying inflationary pressures are firming, a troubling sign for the Fed as it balances the risks of restrictive monetary policy with a labor market that has been showing cracks. Focus on inflation will now revolve around PCE inflation data, which is the Fed’s preferred measure of inflation, at the end of the month.

The spread between the two- and 10-year yields rose to 56.7 bps from 52.8 bps on Thursday.

CURRENCY FUTURES

The USD index is lower, although its downside may be limited after data showed an uptick in import prices, which grew 0.4% in July. Thursday’s high inflation reading is likely to complicate the Fed’s future rate path, as PPI inflation serves as a leading indicator to CPI inflation, as the costs producers face take time to make their way to the final product that reaches consumers. Markets are priced in for a rate cut in September from the Fed; however, a 50 bps cut would be off the table, while further easing past the September meeting remains questionable.

Euro futures are higher. Market attention will focus on the Trump-Putin meeting in Alaska today. The euro will likely benefit from a Ukraine ceasefire deal or any strong positive developments. Industrial production in the eurozone slumped more than expected in June, as the pullback of tariff frontrunning made its effect. Industrial production in June declined by 1.3%, more than offsetting May’s 1.1% gain and coming in below economists’ expectations for a 0.9% drop. The contraction was broad-based, with declines across all categories of goods production—from durable goods to short-term consumer items—while energy output saw a modest increase. Despite the downturn in industrial activity, second-quarter GDP growth remained unchanged at 0.1%, in line with the initial estimate.

British pound futures are higher as the sterling rose against the dollar overnight and is set to end the week higher after a week of upbeat economic data and a hawkish rate cut by the Bank of England. GDP grew 0.3% in the second quarter, a slowdown from the previous quarter’s 0.7% growth but a resilient figure in the face of higher US tariffs. On an annualized basis, the UK economy expanded by 1.4% in the second quarter. The latest figures offer a measure of reassurance for UK government officials, even as the broader economy grapples with a weakening labor market. Unemployment edged higher in the second quarter, reflecting a slowdown in business hiring. At the same time, consumer behavior has shifted, with households opting to save more and spend less amid ongoing economic uncertainty, which has dampened traditional spending patterns. June’s manufacturing and industrial production figures exceeded expectations, marking a notable rebound from the prior month’s contraction. However, signs of economic uncertainty persist. Business investment fell sharply by 4% in the second quarter—well below the anticipated 0.1% growth and a significant reversal from the 3.9% expansion recorded in Q1. While the GDP data offers near-term support for the pound, underlying vulnerabilities remain, particularly in the labor market and investment landscape. Given the persistence of inflation, which is expected to peak in September, the Bank of England is likely to maintain a cautious stance and continue its gradual easing cycle.

Japanese yen futures are higher after GDP data calmed recession fears in the country. Real gross domestic product increased 0.3% on a quarter-over-quarter basis in the April-June period, while the January-March quarter was revised up to 0.1% from 0%. On an annualized basis, the economy grew 1.0%. The figures added to speculation that the Bank of Japan could resume monetary tightening by the end of the year, especially as the trade picture with the US is much more certain. Consumer spending rose 0.2% in the second quarter, while capital expenditure increased 1.3%, indicating strong corporate appetite for investment related to labor-saving and digitalization efforts, a positive sign that business trudged ahead despite the uncertainty related to tariffs while the consumer remained supportive as a growth in wages helped spending stay on track. Industrial production figures for June show that production grew 2.1%, reversing May’s 0.1% decline and beating out expectations of 1.7% growth.

Australian dollar futures are higher, paring some losses from yesterday, when the Aussie was under pressure from a strong PPI reading out of the US that dimmed hopes of extended rate cuts from the Fed. Australia added 24,500 jobs in July, a notable improvement from June’s revised gain of just 1,000, though slightly below expectations of 25,300. The unemployment rate edged down to 4.2% from 4.3%, easing pressure on the Reserve Bank of Australia to cut rates in the near term. Following the release, market expectations for a September rate cut fell from 40% to 30%, though a November cut remains likely. Wage growth held steady at 3.4%, just above forecasts, and is not expected to hinder the RBA’s path toward further easing.

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