On the heels of last week’s May jobs report, the market now turns its attention to the next symptom of economic health: retail sales numbers, which will be released on Thursday. Prospects for another strong report may also increase speculation of an interest rate increase later this year.
Last week’s jobs release confirmed general sentiment of a healthy labor market that is continuing to improve. Nonfarm payrolls beat the Estimize consensus by about 20%, topping 200K for the first time since February, and weekly earnings and unemployment claims also came in as slightly more optimistic than Estimize as well, with earnings about $2 higher and claims almost two percent lower.
A potentially strong retail report could have big implications as the Fed continues to consider a rate increase sometime this year. The Estimize community is currently calling for a 1.2% increase in the benchmark, which would spike retail activity to its highest level in six months. Some notable Estimize contributors, however -including Morgan Stanley and RBC- are expecting an even higher jump, at levels close to 1.8% growth, putting the number at nearly its highest level since before the recession. Analyst @ahujachand, a buy-side contributor, has been the most historically accurate analyst on Estimize for retail sales and is calling for 1.33% growth as well.
Such strong expectations are sparking speculation about a rate increase, something investors are wary of after the first quarter slowdown. In recent history, the Federal Reserve has raised interest rates on three occasions: in 1994, 1999, and in 2004. As the chart below shows, the twelve months leading up to a rate increase are typically marked by strong growth (which leads the Fed to act in the first place). After the Fed made its move, however, stocks fell each time in the three-months following the rate hike, before eventually improving over the course of the year.
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