America goes shopping and hits rate cut hopes

US consumers shrugged off recessionary fears and went shopping last month, sending retail sales rebounding sharply after two months of decline.

The news dampened expectations of a half percentage-point cut in US interest rates next week, although a smaller reduction is still forecast by most analysts.

Sales rose 0.8% in April, according to yesterday's figures from the commerce department, with most sectors enjoying healthy growth.

Households appear immune to worries that the US economy could be sliding into recession. The University of Michigan's consumer confidence index rose unexpectedly in May, reversing a long slide that began late last year.

Economists said the reports suggested consumer spending may be sustained, despite the economic slowdown, casting doubts over how long the US Federal Reserve will continue its aggressive interest rate cutting campaign.

"This is good news for the economy, and probably raises the odds the Federal Reserve will cut interest rates only 25 basis points next week, though our call is still for 50," said Drew Matus, senior financial economist at Lehman Brothers in New York.

Shares fell sharply in early trading in New York as traders marked down the chances of further reductions in borrowing costs. "It's a confused market out there. Investors don't know what to root for," said Uri Landesman, chief investment officer with AFA Management Partners. The blue chip Dow Jones industrial average fell 90.7 points by lunchtime, or nearly 1%. The euro also took a tumble, falling to fresh three-week lows against the dollar as investors signalled their displeasure with the European Central Bank's handling of monetary policy. The ECB's decision to trim rates by 0.25% on Thursday came as a shock to the markets, offering a sharp contrast to the hawkish line of its policymakers' recent speeches.

"Almost everyone was caught by surprise, raising questions about the ECB's judgment and undermining their credibility," said Nigel Anderson from the Royal Bank of Scotland. The euro fell to $0.8759, its weakest since April 18, and also lost more than 0.5% against the yen at 107.20.

Data showing inflation in Germany - the euro zone's largest economy - running at 2.9%, well above the ECB's inflation ceiling of 2%, added to its credibility problems.