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US consumer spending rebounds, supporting yields and the dollar

The dollar is up and risk-sensitive currencies are in retreat as benchmark Treasury yields near the highest levels in almost 15 years on stronger-than-expected retail sales numbers.

North America

US retail spending jumped by more than forecast last month as underlying consumer demand remained strong, keeping monetary tightening expectations aloft.
According to figures published by the Census Bureau this morning, total receipts at retail stores, online sellers and restaurants climbed 0.7 percent on a month-over-month basis in July, beating consensus estimates closer to 0.4 percent and rising 3.2 percent over a year prior. Gas station sales climbed 0.4 percent month-over-month as global energy prices rose. Motor vehicle and parts dealers posted a -0.3 percent loss. Receipts at food services operations rose 0.8 percent, and spending at restaurants surged 1.4 percent.

So-called “control group” sales – with gasoline, cars, food services, and building materials excluded – leapt 1 percent, smashing expectations for a 0.5-percent gain, and pushing Treasury yields higher – while adding to the momentum carrying the dollar forward. We note however, that on a year-over basis, retail sales are still losing momentum, subtracting from tangible goods demand within the US and across export-led economies in the rest of the world.

Monthly change in retail sales, 12-month rolling average, %

Separately, the Federal Reserve Bank of New York yesterday said that household inflation expectations fell across all time horizons in July, with year-ahead price expectations for food, medical care, and rent declining to their lowest levels since at least early 2021. The share of consumers expecting to be better off a year from now climbed to the highest since September 2021.

Canadian inflation accelerated in July, but with base effects impacting energy price calculations and rising mortgage costs playing the biggest role in driving the headline print, the Bank of Canada is likely to remain firmly on the sidelines. Data released by Statistics Canada this morning showed the Consumer Price Index rising 3.3 percent on a year-over-year basis in July, up from the 2.8 percent increase recorded in June, and slightly above consensus expectations. The agency noted however, that the “acceleration in headline consumer inflation was mainly attributable to a base-year effect in gasoline prices” with a big decline in pump prices last July now removed from the 12-month calculation.

Gasoline prices rose 0.9 percent month-over-month, but the energy sub-index fell -8.2 percent year over year, posting a smaller drop than June’s -14.6-percent move, reducing the drag on the overall print. Food prices slowed their climb, up 8.5 percent year-over-year, with gains decelerating from June’s 9.1-percent increase. Mortgage interest costs surged 30.6 percent from the prior year, making up, by far, the largest contribution to the headline number, with the all-items index excluding mortgage interest cost index rising just 2.4 percent in July.

Core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 3.65 percent relative to the same period last year, down from a revised 3.7 percent gain in the prior month. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.

Consumer price index, 12-month % change

With base effects and potentially short-lived energy price gains unlikely to shake the central bank’s long-standing focus on underlying inflation indicators, markets should remain overwhelmingly convinced of a pause at the September meeting. We expect core price pressures will continue to ease in coming months, joining still-nascent signs of softness in labour markets and a sharper decline in consumer consumption in helping to put the conditions in place for a series of rate cuts in 2024. The loonie, arguably due for a short-term bounce, should face stronger headwinds as the year progresses.


British wages increased at the fastest pace in decades in the three months to June, raising the odds on more rate hikes from the Bank of England – while also increasing the risk of a hard landing in the economy. Data from the Office for National Statistics this morning showed average weekly earnings accelerating to 7.8 percent year-over-year in the three months to June, from an upwardly revised 7.5 percent in the three months to May, even as the unemployment rate rose to 4.2 percent from 3.9 percent in the previous three-month period. According to the agency’s statisticians, this was the most aggressive rate since comparable records began in 2001, and was well above expectations for a 7.3 percent gain.

The pound jumped on the release as traders moved to price at least three more quarter-point rate hikes over the next seven months, but then fell as the prospect of higher borrowing costs weighed on the economic outlook.

Asia Pacific

The People’s Bank of China surprised markets with an earlier-than-expected cut in its benchmark interest rate last night, sending the yuan tumbling against the dollar.
Policymakers slashed the Medium Term Lending Rate, which serves as a floor for loans to banks and ultimately helps determine borrowing costs for businesses and individuals, from 2.65 percent to 2.5 percent, while pushing another circa-$55 billion in new liquidity to the financial system. The move pushed onshore rates lower, widening the rate differential between two-year government bond yields in China and the US to the most negative on record (note that data collection was patchy prior to 2007).

Difference between Chinese and US 2-year government bond yields, %

The policy changes came ahead of data showing that retail sales rose 2.5 percent in July compared with a year earlier, down sharply from the 3.1-percent pace posted in June, and well below market expectations that were closer to 4.5 percent. Industrial production climbed 3.7 percent year over year, also down from June’s 4.4 percent, and missing forecasts for a 4.6 percent increase as exports slumped and domestic demand slid. Fixed asset investment rose just 3.4 percent from a year prior in the period between January and July, reflecting a broad-based sense of caution across the corporate sector.

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