- July retail sales are the next big macro data point for the stock market to watch.
- A thump in retail sales could fuel the Fed’s hawkishness and put pressure on the recent rally in equities.
- Retail heavyweights Target and Walmart will also report quarterly results next week.
US retail sales will be the next big data pit stop en route to the Federal Reserve’s rate hike decision next month and a report that beat expectations could drag stocks lower in the near term, market analysts say.
July retail sales, expected Wednesday, are expected to demonstrate continued resilience among U.S. shoppers faced with decades of high prices for food and other necessities. Retail sales provide a snapshot of consumption that drives approximately two-thirds of activity in the world’s largest economy.
“We are in a space where good news is bad news,” Keith Buchanan, senior portfolio manager at Globalt Investments, told Insider. “Good news about the economy leads the market to believe that gives the Federal Reserve a longer lead to be aggressive on inflation,” which is “problematic” for risky assets in the short term, he said.
The Commerce Department’s July retail sales are expected to rise 8.1% year-on-year and 0.2% month-on-month, according to Trading Economics. In June, annual retail sales increased by 8.4% and by 1% monthly. The June report reflected higher gasoline sales with an average gas price of more than $5 a gallon.
According to AAA, gas prices fell below $4 a gallon this week for the first time since early March.
“After a very strong jobs report in July, a sharp rise in retail sales would almost confirm that the US is not in a 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.
The fall in gas prices in July has provided a tailwind for consumers to spend in other categories and there are few signs of stress in lower-income spending patterns, the bank said.
“If the Fed still sees that we have a strong economy… they would probably be willing to continue this tightening cycle and make a Fed pivot less likely,” Brad Roth, chief investment officer at Thor Financial Technologies, told Insider .
The Fed has hiked rates four times this year to a range of 2.25% to 2.5%, and more hikes are in the pipeline as the Fed does everything it can to bring inflation back to its target of 2. %. The last two rate hikes each had a hefty 75 basis points.
“The market is kind of stuck between a rock and a hard place,” said Jan Szilagyi, chief executive of Toggle AI, an investment research firm.
“If we also get strong retail sales data, I think we’ll move from concerns about a recession to worries about an economy still getting too hot. Which means the Fed will have to be more aggressive on the tightening side,” he said. .
The S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite rose this week after investors learned that July consumer price inflation cooled from June, supporting the view that policymakers may opt for a smaller 50 basis point rate hike in September. Wholesale inflation also 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 could see a solid retail sales report as a reason to push stocks higher.
“If you look at the jobs numbers, it seems like the economy is still doing pretty well amid 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 recession right away,” he said. “There is a chance of another 75 basis point increase and then… [the Fed] could breathe.”
Retail heavyweights Walmart, Target and Home Depot will report second-quarter financial results next week, providing more insight into the consumer’s condition.
In the medium and long term, positive economic data is helpful for stocks, especially as the US could potentially register two consecutive quarters of economic contraction, Thor Financial Technologies’ Roth said.
“If we can see an uptick in some of these leading indicators, that fear of a recession will start to subside and we’ll start to see more people who are more comfortable investing in the market.”