US Retail Sales in focus

• ZEW declines fail to stifle European stocks.

• Markets growing confident of a 50bp Fed rate cut.

• US retail sales in focus.

The FTSE 100 leads the way in early trade today, with a broad-based rally seeing gains across the likes of the banks, miners, oil majors, and domestically focused retailers. Elsewhere in Europe, the German economic outlook remains in the doldrums according to the latest ZEW survey, with sentiment falling to a 11-month low of 3.6 in September. Meanwhile, the current conditions metric fell to a four-year low, highlighting the dour state of play right now in Germany. Never more is the phrase ‘the stock market is not the economy’ more relevant, with the DAX roughly 1% off record highs. While many are looking ahead to a period of strength as central banks start to become increasingly accommodative, the perception of Germany remains relatively unfavourable given policies that have let key industries such as car making slip to cheaper rivals in China.

Coming off the back of a mixed Asian session that saw Japanese stocks weaken in response to USDJPY declines, that dollar weakness instead serves as a reminder for European markets that we are growing increasingly confident that the Fed could take a more adventurous approach when cutting rates on Wednesday. With the CME signalling a 67% chance that the Fed will cut rates by 50-basis points tomorrow, there is no smoke without fire. Thus, traders are left weighing up the implications for stocks, with the risk remaining that markets perceive a 50bp rate cut as indicative a higher likeliness that the US is on course to fall back into recession.

For today, the focus turns to the latest retail sales data as traders seek to ascertain the strength of the consumer. Coming at a time where the Fed appear to be more data dependent than ever, a worsening level of consumption could yet help secure a 50-basis point cut given how reliant the US economy is on domestic demand. Despite being notoriously volatile, the core retail sales figure has only posted two negative monthly figures in the past 16-months. That strength looks set to remain according to estimates, with a 0.2% figure signalling continued confidence that a soft landing remains the base case scenario.