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Australian retail sales smashed expectations in August, rising 0.4% to $25.128 billion in seasonally adjusted terms.

Markets had been expecting an increase of 0.2%, following flat growth in July.

The monthly increase was the largest in percentage terms since October 2015.

It left the year-on-year increase in sales at 2.8%, up marginally on the 2.7% pace recorded in the 12 months to July.

While a solid result, the trend in sales remains lower, as seen in the chart below.

According to the ABS, the main reason behind the gain in August was a surge in department store sales which jumped 3.5%. They had previously fallen by 5.8% in July, leaving overall sales flat in July.

Alongside the boost provided by department store turnover, sales also increased in cafes, restaurants and takeaway food services (1.2%), food retailing (0.3%) and household goods retailing (0.2%).

Offsetting those gains, there were falls recorded in other retailing (-0.6%) and clothing, footwear and personal accessory retailing (-0.4 per cent).

Over the past year, clothing, footwear and personal accessories sales, along with those in cafes, restaurants and takeaway food services, recorded the fastest growth of all categories at 6.9% and 5.9% respectively. While they outperformed in August, sales at department stores fell 2.4%, the largest decline of any category.

Food sales, the largest category by dollar spend, grew by 2.6%.

By state and territory, sales increased in Victoria (0.7 %), New South Wales (0.5%), Queensland (0.7%), Australia’s most populous states.

South Australia and the Australian Capital Territory, at 0.4% and 0.7% respectively, also made positive contributions.

Offsetting those gains, the mining states and territories, Western Australia and the Northern Territory, saw sales fall by 0.5% apiece. Tasmania, one of the best performing states over the past 12 months, saw sale dip 0.1%.

Over the past year, the ACT and South Australia, at 6.9% and 4.6% respectively, recorded the fastest sales growth of any state and territory.

Those in New South Wales, Victoria and Queensland were remarkably familiar, growing by between 2.9% to 3.3% over the same period. Sales in Tasmania grew by 4.3%.

The major mining states and territories, Western Australia and the Northern Territory, saw sales dip by 0.5% and 0.9% respectively.

The only question now is whether the August report is an anomaly, much like the weakness seen in July, or the start of a longer lasting trend.

The optimists will say it bodes well for a rebound in sales heading into Christmas, mirroring the strength seen in recent consumer confidence reports.

However, the pessimists will say that the August result merely offsets the weakness seen in July, largely due to the wild swings seen in department store sales. The overall trend, as seen in the yearly pace of sales growth, continues to weaken.

Only yesterday, the RBA observed in its October monetary policy statement that household consumption, of which retail sales accounts for just shy of a third, “has been growing at a reasonable pace, but appears to have slowed a little recently”.

Policymakers will be hoping that the August result is the start of an acceleration in sales growth, but further clarification is still required.

We’ll get that with the release of the September retail sales report, which will include quarterly retail volumes, along with the household consumption figure in the September quarter GDP report released in early December.

The Australian dollar has lifted following the retail sales report, jumping by around 30 pips to .7628.

Bond futures have also weakened (yields higher) while cash rate futures have trimmed the odds of a 25 basis point rate cut from the RBA in November to around a one in five chance.

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