Retail sales in the United States unexpectedly rose in August, potentially easing fears of a broader economic slowdown ahead of a key interest rate decision by the Federal Reserve this week.
On a monthly basis, retail sales rose 0.1%, slowing from a revised 1.1% expansion in July, based on data from the Commerce Department's Census Bureau on Tuesday.
Economists had expected a 0.2% decline in the figure, which is not adjusted for inflation and mostly tracks goods.
Excluding fuel, automobiles, construction materials, and food services, the measure rose 0.3% last month, compared to a revised increase of 0.4% in July. These so-called "core retail sales" contributed to the Gross Domestic Product (GDP) reading, which was estimated to grow around 2.5% on an annual basis in the July-September quarter, down from a 3.0% rate in the second quarter.
Traders focused on the conclusion of the Fed's latest two-day meeting this week. With markets already counting on the start of an easing cycle that will cut rates from a 23-year high of 5.25% to 5.5%, much of the discussion has focused on the scope of this September's decision.
Based on the closely watched FedWatch Tool from CME Group (NASDAQ:CME), the probability of a rate cut of 50 basis points this week versus the usual cut of 25 basis points now stands at 67%.
The odds were balanced before last weekend, but expectations for a bigger reduction were bolstered by media reports suggesting that such a reduction was still an option. Former New York Fed President Bill Dudley also argued that a major reduction was needed because short-term interest rates were "so much higher" than neutral levels that neither helped nor hindered economic activity.
Indications that economic activity is slowing could prompt the Fed to implement significant reductions in borrowing costs to support the economy.
The latest retail sales reading is the last key data Fed officials will receive before making their decision, though analysts at Vital Knowledge said the findings were "unlikely to significantly change" the central bank's rate plans or the broader narrative about growth.
Policymakers are also now weighing lingering increases in consumer prices, as well as figures that show slack in the American labor market. Fed Chairman Jerome Powell said in August that "the time has come" to adjust monetary policy because of potential "downside risks" facing the job market.
US stock futures traded higher after retail sales data, while rate-sensitive 2-year Treasury yields rose. Yield usually moves opposite to price.
