The U.S. economy entered the second half of the year with a notable wobble in consumer spending as headline retail sales registered their first monthly decline in nine months in July. That surprise print arrives just ahead of quarterly results from major U.S. retailers Home Depot, Target and Walmart, which will provide another key read on household demand later this week.
Several technical and timing factors amplified the July slide. A retreat in oil prices in the period - a move that has since been reversed - subtracted from the nominal value of fuel purchases and thus from the retail sales aggregate. Separately, one large online retailer advanced its annual discounting event into June this year, shifting some sales out of July. Those mechanics do not erase the data point, however, and the report dovetails with a deterioration in consumer sentiment revealed by the University of Michigan’s latest survey.
Taken together with recent subdued inflation readings, the softer retail figure has reduced financial-market odds of a Federal Reserve rate increase in September. That easing in rate expectations has been one factor supporting U.S. equity indexes, which have continued to push to record highs on the back of this recalibration of monetary policy risk. The picture remains fluid: the rebound in oil prices over recent weeks amid an ongoing Iran war standoff could begin to change the policy calculus ahead of the Fed’s next meeting.
Investors will get more information on central bank thinking this week, with minutes from July’s split Federal Open Market Committee meeting due on Wednesday and an industrial production release scheduled for tomorrow. These data points and records of internal Fed debate will be watched for signals on the timing of any further tightening.
On the global front, Japan added another market-moving data point when its 10-year government borrowing rate rose to a three-decade high on Monday. That move came even as Japanese gross domestic product underwhelmed expectations, recording an annualized increase of 1.1% in the second quarter. Slower-than-expected growth, to some degree attributed to higher energy costs, could complicate the Bank of Japan’s plans to raise policy rates. Despite the mixed signals, the yen was steady on Monday as a broadly weaker dollar, tied to changing Fed prospects, remained the dominant theme in FX markets.
China’s economy also showed signs of cooling at the outset of the second half. Industrial output and retail sales slowed, hit in part by extreme weather disruptions and persistently soft domestic demand. Those trends are renewing pressure on policymakers in Beijing to consider additional stimulus to reignite household spending. Addressing that challenge will be difficult while the property sector remains depressed: new home prices in July were down 3.2% from a year earlier and down 0.1% from June.
Market participants will be paying attention to a handful of near-term events for extra clarity on the economic backdrop and policy outlook:
- New York Fed manufacturing survey for August (8:30 a.m. EDT)
- Canada July consumer price index (8:30 a.m. EDT)
- Release of minutes from the Federal Reserve’s July policy meeting (Wednesday)
For corporate earnings watchers, the upcoming reports from Home Depot, Target and Walmart will be scrutinized for indications of whether consumers are sustaining discretionary and essential spending. For real estate and infrastructure observers, the persistent weakness in China’s housing market and the implications of higher energy costs in Japan are variables that bear on demand dynamics and financing conditions across sectors.
Overall, the retail sales miss has narrowed the path to a September Fed hike for now, but the situation remains contingent on energy markets and coming economic releases. The week ahead promises further data and company reports that could either reinforce the recent market narrative or prompt a reassessment of policy and asset-price expectations.