What’s Going On Here?Data out on Wednesday showed that US retail sales fell for the first time in five months in May. What Does This Mean?You have to spare a thought for the kids who expected to open a PS5 at their birthday parties last month, only to smile stiffly as they unwrapped an Etch-A-Sketch instead. After all, Americans have been scaling back their big-ticket electronics buys, as well as their spending on furniture, cars, and a handful of other categories. And even those where sales grew – like grocery stores and gas stations – were in a worse position than it first seemed: the figures aren’t adjusted for inflation, meaning consumers were probably just paying more and buying less. All in all, US retail sales fell by 0.3% in May from the month before – less than the already grim 0.1% uptick economists were expecting, and well down on April’s 0.7% growth. Why Should I Care?For markets: Encore, encore.
It’s obvious what happened here: Americans are responding to the highest inflation rate in over 40 years. That was as good a reason as any for the Federal Reserve (the Fed) to raise interest rates by 0.75% on Wednesday – the first time it’s implemented such a big hike since 1994, and taking rates to their highest since just before the pandemic. And there might be more where that came from: the Fed indicated that rates could now hit 3.4% by the end of the year – up from its previous forecast of 1.9%.
Zooming out: This is going to hurt.
The European Central Bank (ECB) has been in damage control mode of its own, after having announced last week that it would start hiking interest rates in the region next month. The ECB met for an emergency session on Wednesday to discuss how it could help protect some of the eurozone’s more indebted members from higher rates, and pledged to tackle surging borrowing costs to prevent the same debt crisis it experienced a decade ago. | 