Further strength in U.S. consumer spending likely ahead

The most anticipated data release of the week did not disappoint. U.S. retail sales rose +1.2% M/M in May, right on par with market expectations. April's figure was upwardly-revised from 0.0% to +0.2%. While strength in autos was expected following last week's reports that monthly light vehicle sales had reached a 10-year high in May, the robust gain in the control group measure points to broader gains in personal spending and underscores an uptick in economic momentum.

Numerous reasons have been put forward, from a post-financial crisis change in consumer behavior to harsher weather keeping folks indoors, as to why consumers failed to show up in the first quarter. The fact that the savings rate had periodically dipped below 4.5% over the past few years (relative to 5.6% in April), suggests that consumers aren't afraid to pull out their wallets when they feel confident enough to do so. Robust sales of big ticket items such as autos may be a sign that this is now occurring. With an improving job market and strong real wage gains, alongside savings from lower gas prices, there is every reason to believe that further strength in consumer spending lies ahead.

"Following last week's bumper jobs report, this release is likely to solidify market expectations that a first rate hike is likely around the corner, with markets pricing in a near-even odds for a rise by October. At next week's FOMC meeting, we look for the Fed to acknowledge the recent uptick in economic momentum with the FOMC likely eyeing a lift-off in September." said TD Economics