Josh Gilbert, market analyst at eToro, shares his three things to watch in Australia in the coming days.
US retail sales (Tuesday)
July US retail figures released in August showed heavy acceleration, jumping by 1%, the biggest lift all year. Consumers are anticipating an all-but-assured rate cut of at least 25bps come Thursday, but the balancing act comes from a weakening job market that is heavily in focus in the US, maybe not giving consumers the confidence to fully open their wallets.
That confidence is also reflected in Deloitte's annual holiday retail forecast, showing that persistent inflation has begun to wipe out savings for many. This may dampen retailers' hopes for a flurry of spending into year-end. US consumer credit card debt is also rising, so that Fed rate cut can’t come soon enough for some.
Last month’s solid reading was boosted by light vehicle sales, but those vehicle sales fell 4.4% in August, which could see a pullback in the headline number. The consensus is for retail sales to rise 0.2% year-over-year. Regardless, the US appears to have successfully avoided the threat of a recession and a soft landing (or as soft as can be) is within reach.
Another rate cut after September will only further stoke consumer spending, but whether the Fed thinks this is achievable or necessary before the end of the year is another question.
Fed rate decision (Thursday)
On that note, let’s talk about this week’s Fed rate call. CPI and PPI results have all but laid the groundwork for a 25bps cut next week, and although core CPI came in slightly hotter than expected, the Federal Reserve will feel confident that it is taming inflation.
A 50bps cut is still very much on the table, though. Markets see a completely even split between both decisions, with a 50% chance of a 25bps cut and a 50% chance of a 50bps cut. A big focus for the Fed moving forward will be the labour market. If the unemployment rate continues to rise, the likelihood of a jumbo cut later this year will grow.
A 25bps move from the Fed is the move they want to make and should provide a boost to equities. This move signals the Fed’s confidence in the economy and eases fears of a severe slowdown.
Our base view of an economic soft landing still stands, but there is a fine balancing act between the economy slowing too fast and the Fed having to make outsized cuts down the line.
AU unemployment (Thursday)
Although low unemployment continues to be a concern in the RBA’s fight against persistent inflation, last month’s figures suggest the unemployment rate is heading in the right direction for the central bank to consider relieving high interest rates following its aggressive hiking cycle over the last year.
July’s unemployment rate rose to 4.2% from 4.1%, but the RBA will still want to see unemployment climb to somewhere between 4.25% and 4.75% before disclosing a solid strategy that supports more than one rate cut in the next six months. This week could show further signs of labour market cooling, with expectations for 20,000 jobs to be added and the unemployment rate to tick up to 4.3%.
The RBA’s leadership has been insistent that we’re not out of the woods yet – reaching an unemployment rate level above 4.25% remains the central bank’s goal.
Although Michele Bullock was adamant that we wouldn't see a rate cut this year, if August’s unemployment rate continues the upward trajectory, we may well see chances of a rate cut in December grow, especially with 2025’s first meeting not due until February 18.