The US consumer demonstrated remarkable resilience in June, as retail sales outperformed expectations, signaling strong discretionary spending and underpinning a rally in the US dollar.
The retail sales control group, a key indicator excluding autos, gasoline, building materials, and food services, surged by 0.9% compared to the anticipated 0.2%, marking the highest increase in over a year.
Key retail sales data
Overall retail sales were flat in June, aligning with the Briefing.com consensus of a 0.1% decrease. This followed an upwardly revised 0.3% increase in May. The headline figure was dampened by a 2.0% decline in motor vehicle and parts dealers' sales, influenced by the CDK Global cyberattack, and a 3.0% drop in gasoline station sales, driven by lower gas prices.
However, when excluding autos and gasoline, retail sales painted a much rosier picture with a 0.8% month-over-month rise. Specific sectors showed significant strength:
- Building material and garden equipment sales: Up 1.4% after a 0.7% decline in May.
- Furniture and home furnishing store sales: Increased by 0.6%, following a 0.7% rise in May.
- Clothing and clothing accessories stores: Rose by 0.6%, after a 1.2% increase in May.
- Electronics and appliance store sales: Jumped 0.4% after a 0.3% increase in May.
- General merchandise store sales: Increased by 0.4% following a 0.1% rise in May.
- Nonstore retailers sales: Surged 1.9% after jumping 1.1% in May.
- Food services and drinking places sales: Increased by 0.3%, following a 0.4% rise in May.
The key takeaway from this robust retail report is the sustained level of discretionary spending on goods, which counters any narratives of an impending economic hard landing.
Market reaction and economic implications
The strong retail sales data had an immediate impact on financial markets. The US dollar appreciated by 30-50 pips across the board, while Treasury yields rose, particularly at the front end. The yield on the 2-year Treasury note increased by 5 basis points to 4.47%.
This market response underscores the growing belief that the Federal Reserve might maintain a more hawkish stance in the near term.
The pricing for rate cuts in 2024 adjusted slightly, with expectations falling to 64 basis points from 68 basis points before the retail sales data release. This adjustment reflects the market's recalibration of the Fed's potential policy path in light of stronger-than-expected consumer spending.
The Fed's dilemma
The Federal Reserve now faces a critical question: how aggressively should it lean into the 'soft landing' scenario? A strong retail sales number is not inherently problematic for the Fed, provided it is accompanied by continued improvements in inflation.
However, persistent aggressive consumer spending could lead retailers to raise prices, potentially reigniting inflationary pressures.
The Fed will need to balance the positive signals from robust consumer spending with the risks of inflation. If inflation remains under control, the Fed might opt for a more measured approach to rate adjustments.
Conversely, if inflationary pressures resurface, the Fed could be compelled to implement more stringent rate hikes to cool the economy.
Conclusion
June's retail sales data highlight the enduring strength of the US consumer, reflecting solid discretionary spending and a resilient economy. This robust performance has significant implications for the Federal Reserve's monetary policy decisions and the broader economic outlook.
As the Fed deliberates its next steps, investors and market participants should closely monitor consumer spending patterns and inflation data.
The interplay between these factors will be crucial in shaping the economic landscape and informing the Fed's approach to achieving its dual mandate of price stability and maximum employment.