- July retail sales are the next big macro data point to watch for the stock market.
- A beating in retail sales could boost Fed hawkishness, putting pressure on the recent rally in equities.
- Retail heavyweights Target and Walmart are also expected to report quarterly results next week.
U.S. retail sales will be the next major data stop on the way to the Federal Reserve’s rate hike decision next month and a report that beats expectations could pull stocks lower in the near term, according to market analysts.
July retail sales, due Wednesday, are expected to show continued resilience among U.S. shoppers facing decades-high prices for food and other necessities. Retail sales provide insight into the consumption that drives about two-thirds of activity in the world’s largest economy.
“We’re in a space where good news is bad news,” Keith Buchanan, senior portfolio manager at Globalt Investments, told Insider. “Good news about the economy is leading the market to believe this gives the Federal Reserve longer room to be aggressive on inflation,” which is “problematic” for near-term risk assets, a- he declared.
The Commerce Department’s July retail sales are expected to rise 8.1% year on year and 0.2% month over month, according to Trading Economics. In June, 12-month retail sales increased 8.4% and 1% per month. The June report reflected rising gasoline sales with average gasoline prices above $5 a gallon.
Gas prices this week fell below $4 a gallon for the first time since early March, according to AAA.
“After a very strong jobs report in July, a strong jump in retail sales would all but confirm that the United States is not in recession,” Bank of America said in a report this week. The June jobs report showed the US economy added 528,000 jobs, more than double what economists had expected.
July’s plunge in gasoline prices is serving as a tailwind for consumers to spend in other categories and there have been few signs of stress in the spending habits of low-income people, the bank said.
“If the Fed still sees that we have a strong economy…they would probably be willing to continue this cycle of tightening and make a Fed pivot less likely,” Brad Roth, chief investment officer at Thor Financial Technologies, told Insider. .
This year the Fed has raised interest rates four times to a range of 2.25% to 2.5% and more hikes are on the way as the Fed fights to bring inflation back to its target by 2%. The last two rate hikes were valued at 75 basis points each.
“The market is kind of stuck between a rock and a hard place,” said Jan Szilagyi, managing director of Toggle AI, an investment research firm.
“If we also get strong retail sales numbers, I think we’re going to go from worrying about a recession to worrying about an economy still running too hot. Which means the Fed will have to be more aggressive on the tightening side,” he said.
The S&P 500, Dow Jones Industrial Average and Nasdaq Composite climbed this week after investors learned consumer price inflation in July had cooled from June, supporting the idea that policymakers politicians could opt for a lower rate hike of 50 basis points in September. Additionally, headline inflation fell 0.5% in July, the first decline since April 2020.
Ryan Detrick, chief market strategist at Carson Group, told Insider that stock investors have already priced in numerous Fed rate hikes and may see a strong retail sales report as a reason to push stocks higher. the rise.
“If you look at the jobs numbers, it looks like the economy is still doing pretty well amidst all the rate hikes,” Detrick said. “If the retail sales numbers are strong and healthy, that probably means we’re not likely to go into a recession right away,” he said. “There is a probability of another 75 basis point hike and then [the Fed] could catch his breath.”
Retail heavyweights Walmart, Target and Home Depot will release second-quarter financial results next week, providing further insight into the state of the consumer.
Over the medium to long term, positive economic data is helpful for stocks, especially as the U.S. could potentially see two straight quarters of economic contraction, said Roth of Thor Financial Technologies.
“If we can start to see a rebound in some of these leading indicators…those recession fears will start to subside and we’ll start to see more people feeling more comfortable investing in the market again.”