Markets focus on US retail sales and jobs data

The European markets are set for a positive start to Thursday following modest gains in the US yesterday and Asia-Pacific markets overnight. The European market closed lower on Wednesday as investors reacted to the latest inflation data out of the United States, while Wall Street posted modest gains after Tuesday's massive sell-off.

On Thursday, investors will get a glimpse of August's French inflation data. Due to the death of Queen Elizabeth II, the Bank of England has delayed its monetary policy meeting until next week.

Stocks appear to have shrugged off the hot August CPI reading. Consequently, next week's Federal Reserve meeting promises to be a fascinating collision between investors convinced that little more can be done to bring inflation under control and policymakers who are adamant they have plenty left to do. With core inflation accelerating and unemployment under 4%, will Fed Chair Jerome Powell signal a slowdown within a week?

What the bond market displays

The confidence among stock investors that inflation will be "transitory" also extends to bond investors. Investing in fixed-income securities implies that fixed-income investors are betting that the annual Consumer Price Index (CPI) will decline to an average of close to 2% in the next twelve months due to the gap between nominal yields and inflation-protected yields. To accomplish this, inflation would have to fall more quickly than the 7.7-point drop in CPI during the 2008 recession. Since the Fed began hiking rates in March, inflation expectations seem to have fallen far too low. However, the 12-month average for actual CPI continues to rise during the same period. It is possible that this disconnect could cause fresh market turmoil when the Federal Reserve meets next week.

Can rate cuts happen in the near future?

Inflation in the United States may have reinforced speculation that the Federal Reserve will hike rates in September. Still, it has not dissuaded traders that the central bank will be cutting rates once again in the near future. Among the most important charts in the markets today, expectations for a rate cut in 2023 are refusing to budge and are moving back toward pricing in a movement of 50 basis points. Most cuts are expected to occur during the following year's second half. In addition to pushing the US yield curve deeper into inversion, the 2-year/30-year Treasury spread reached levels not seen since 2000 due to the higher-than-expected CPI reading. A flurry of recent commentary on a soft landing for the US economy appears to have little effect on the bond market, suggesting that the market continues to expect a recession in the US as the most likely outcome.

Events of the day

Retail sales are expected to be released on Thursday, with analysts expecting a 0.2% month-over-month increase. Retail sales in the United States have been positive every month this year, with the exception of a modest -0.1 decline in May. The numbers we have seen so far this year do not readily indicate whether higher prices are deterring consumer spending, although some signs of slowing have been observed. 

In recent weeks, weekly jobless claims have fallen back steadily. The number of jobless claims expected today is 226,000, which is higher than last week's 222,000.

As indicated by the monthly payroll data, the US labour market continues to add jobs, indicating that there is little reason to anticipate a decline in retail sales in the future. This is especially true when gasoline prices have been falling sharply in the last few weeks, leading to a rebound in consumer confidence.