U.S. retail sales rebounded in July as households boosted purchases of automobiles and a range of other goods, suggesting solid momentum in the economy early in the third quarter.

The upbeat report from the Commerce Department on Thursday should strengthen expectations of a Federal Reserve interest rate hike as early as next month. Although another report showed a rise in new applications for unemployment benefits last week, the trend pointed firmly to a tightening jobs market.

Retail sales increased 0.6 percent last month, broadly in line with economists' expectations. June's retail sales were revised up to show them unchanged instead of the previously reported 0.3 percent drop.

Retail sales excluding automobiles, gasoline, building materials and food services rose 0.3 percent after a revised 0.2 percent gain in June. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Core retail sales were previously reported to have dipped 0.1 percent in June.

Prices for U.S. Treasuries fell and U.S. stock index futures rose after the data. The dollar was trading higher against a basket of currencies.

The retail sales report added to July's fairly upbeat employment and small business confidence reports in suggesting the economy was growing at a steady clip at the start of the third quarter. GDP expanded at a 2.3 percent annual pace in the April-June quarter.

But June data on factory inventories and imports as well as upward revisions to May construction spending figures have left economists expecting that the advance second-quarter GDP growth figure could be raised to at least a 3.0 percent pace.

The June core retail sales figure also points to a stronger GDP number. The government will publish its second GDP growth estimate later this month. Given the steadily firmingeconomy, many economists expect the Fed will raise its short-term lending rate in September for the first time in nearly a decade.

Financial markets, however, have shifted their rate hike expectations toward December following China's devaluation of its currency this week. 


In a separate report, the Labor Department said initial claims for state unemployment benefits increased 5,000 to a seasonally adjusted 274,000 for the week ended Aug. 8.

Though claims have risen for three straight weeks, they have for 23 consecutive weeks remained below the 300,000 threshold, which is associated with a firming jobs markets.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 1,750 to 266,250 last week, the lowest level since April 2000. The tightening labor market is steadily lifting household income, which is supporting consumer spending.

Retail sales last month rose in most categories, with receipts at auto dealerships increasing 1.4 percent after falling 1.5 percent in June. There were also increases in sales at clothing, building materials and garden equipment, furniture and online retailers, as well as at restaurants and bars.

Receipts at sporting goods and hobby stores rose 0.9 percent, but sales at electronics and appliance stores fell 1.2 percent. 

By Lucia Mutikani - Reuters (Editing by Paul Simao)