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Consumer is now bigger worry for economy, Fed rate hike odds fall

Data dump ahead of the Fed

A disappointing drop in retail sales raises more concern about the health of the consumer and reaffirms a widespread view that the Fed will not raise rates next week.

Fed funds futures immediately reflected lower odds — of just 18 percent for a September rate hike, down from 22 percent, after August retail sales were reported to fall by 0.3 percent, according to Jefferies. Odds for a December hike were just above 50 percent, based on fed funds futures.

Core retail sales were down 0.1 percent. That reflects sales, excluding autos, building materials, gasoline and food, and closely correlates to consumption in GDP. Economists had expected a gain of 0.3 percent in core sales, so this number could impact forecasts for third quarter GDP.

"It wasn't a hot one in August this summer for the economy, with consumers pulling back their purchases and factory output sinking. ... We are forced to concede that the economy is sputtering on all cylinders this morning, and the data appear to drive a stake at the heart of our hopes for a Fed rate hike at next week's meeting," wrote Chris Rupkey, chief financial economist at MUFG Union Bank. Rupkey had been one of the few economists who expected a rate hike next week.