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US retail sales increase solidly in boost to economy

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US retail sales increased more than expected in June, pointing to strong consumer spending, which could help to blunt some of the drag on the economy from weak business investment.

[WASHINGTON] US retail sales increased more than expected in June, pointing to strong consumer spending, which could help to blunt some of the drag on the economy from weak business investment.

The report from the Commerce Department on Tuesday did not change market expectations that the Federal Reserve will cut interest rates this month for the first time in a decade.

But signs of strong consumer spending and rising underlying inflation suggest the US central bank is unlikely to cut rates by 50 basis points at its July 30-31 policy meeting as markets had initially anticipated.

Fed Chairman Jerome Powell last week told lawmakers the central bank would "act as appropriate" to protect the economy against risks stoked by a trade war between the United States and China, as well as slowing global growth.

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Market voices on:

"It certainly will counteract weak business spending to some degree," said Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia. "Given that the Fed is most worried about foreign economies and the threat of an escalating trade war, it is unlikely to dissuade them from cutting rates soon."

Retail sales increased 0.4 per cent last month as households stepped up purchases of motor vehicles and a variety of other goods. Data for May was revised slightly down to show retail sales gaining 0.4 per cent, instead of rising 0.5 per cent as previously reported.

Economists polled by Reuters had forecast retail sales edging up 0.1 per cent in June. Compared to June last year, retail sales advanced 3.4 per cent.

Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.7 per cent last month after an upwardly revised 0.6 per cent increase in May. These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have increased 0.4 per cent in May.

June's strong gain in core retail sales, coming on the heels of solid increases in April and May, suggested an acceleration in consumer spending in the second quarter. Consumer spending grew at its slowest pace in a year in the first quarter.

The dollar held gains versus a basket of currencies after the data, while US Treasury yields rose.

Consumer spending is being supported by a tight labour market, even as the broader economy is slowing as weaker business investment, an inventory overhang, a trade war between the United States and China, and softening global growth pressure manufacturing.

The Atlanta Fed is forecasting GDP increased at a 1.4 per cent annualised rate in the second quarter. The economy grew at a 3.1 per cent pace in the January-March quarter. The government will publish its snapshot of second-quarter GDP next Friday. The economy is losing speed in part as last year's stimulus from massive tax cuts and more government spending fades.

REUTERS