Federal Reserve officials can breathe a lot easier this morning because the U.S. consumer is back. Between the 1.1% increase in retail sales last month and the upward revision to spending in August, we are now looking at a strong rebound in GDP growth for the third quarter. The U.S. dollar rose strongly against the Japanese Yen on the heels of the report and we expect risk appetite to improve throughout the day on the heels of stronger data from the U.S. and China.

Over the past month, there have many signs of improvements in the U.S. economy but each piece of positive data has been eyed with skepticism. The drop in the unemployment rate for example was inconsistent with the pace of growth in non-farm payrolls while lower claims was largely attributed to reporting issues from one state. It has been hard for the Federal Reserve and investors to believe that the U.S. recovery is gaining momentum but the improvement in retail sales over the past 2 months is a clear sign of stronger economic conditions. The improvement in the labor market and rise in stocks has made consumers more optimistic and more willing to spend. Excluding food and energy costs, which can be volatile, retail sales still increased 0.9%, more than double analyst expectations. Details of the report show a sharp increase in online shopping, purchases of electronics and food and beverages. This morning’s retail sales report was very important because we needed to know whether stronger labor market conditions translated into stronger spending and the fact that it has is extremely encouraging for the U.S. economy and Q3 GDP growth.

For the Federal Reserve, the back to back improvements in U.S. data will definitely lead some investors to consider the possibility of an earlier withdrawal of monetary stimulus by the central bank. While Fed officials will most certainly breathe easier after today’s retail sales report, one month worth of improvements in the labor market is not enough to alter their cautious outlook for the U.S. economy. With millions of Americans still unemployed, their work is far from done. Aside from retail sales, we also had the Empire State Manufacturing Survey and according to the report, conditions in the NY region improved slightly this month with index rising from -10.41 to -6.16. This is the third straight month of contracting activity, but the improvements in the manufacturing sector is still consistent with a stronger recovery

While the U.S. retail sales report contributed to the rally in USD/JPY, the Yen has been weak for most of the morning following a major Japanese-U.S. M&A announcement. Softbank, one of Japan’s leading telecommunications company announced plans to buy 70% of U.S. based Sprint Nextel for $20 billion, making it the largest ever U.S. acquisition by a Japanese company. Third quarter earnings and Chinese economic data will continue to be a big focus this week. This morning, Citigroup beat analyst expectations with earnings of $1.06 a share despite an 88% decline in profits.

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