Despite the apparent slowdown in the labour market, the latest activity data point to a solid rebound in second-quarter GDP growth. Growth in underlying retail sales reached a two-year high in May, suggesting that real consumption growth accelerated to at least 3.5% annualised in the second quarter. Meanwhile, although industrial activity and business investment remain weak, there are tentative signs of improvement there too. Without a strong rebound in payroll employment growth, however, this won’t be enough to persuade Fed officials to hike rates, especially given the uncertainty caused by the UK Brexit vote. But further ahead, we continue to think that rising inflation will force the Fed to hike rates much faster than the markets currently expect, to a range of 1.75%-2.0% by the end of next year.
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