Will the FED Cut If Retail Sales Show A Weakening US Consumer?

The attention in the US session will be on the US retail sales, a critical economic indicator for the FED which shows the US consumer shape. The US consumer has been one of the drivers behind the “soft landing” of the US economy, thus influencing Federal Reserve policy expectations. A weak or negative reading would prop up bets for two FED rate cuts this year after they fell to just one cut following the hawkish FOMC meeting last week.

Increased volatility is expected in the USD when retail sales are published

May US Retail Sales Report:

    • Consensus Expectations

      Forecasting a 0.2% increase in the headline numbers after a flat figure in April. However, the focus will be on the core retail sales excluding vehicles, gasoline, and building materials (known as the control group), which is expected to rebound by 0.4% after a 0.3% decline in April.

    • Market Concerns

      There is growing apprehension that retail sales could disappoint amid rising interest rates, potentially signaling a slowdown in consumer spending momentum. This could lead to fears that the Fed might be falling behind in its policy adjustments.

    • Analysts View

      Despite some negative signals from recent card data, analysts at the Bank of America remain optimistic, predicting a 0.6% increase in the control group for May, aided by seasonal factors. They note that while card spending was down 0.9% month-on-month seasonally adjusted, the year-on-year comparison shows resilience with a 1.6% increase in early June.

Market Reaction to Retail Sales:

    • Historical Perspective

      In recent years, there has been a tendency for the market to react positively to disappointing economic data, under the assumption that weaker data could delay Fed rate hikes. However, with economic conditions evolving, this “bad-data-is-good-news” dynamic for the USD may shift, particularly if signs of economic weakness raise concerns about growth sustainability.

    • Corporate Performance

      Despite some mixed signals in consumer spending data, corporations have not yet indicated a significant slowdown in consumer demand. Factors supporting continued spending include rising personal wealth, low mortgage rates, and gains in equity markets.

  • Overall Outlook:

The US consumer has been showing increasing signs of weakness, so traders will closely scrutinize today’s retail sales report for clues on further consumer weakness or resilience amid higher borrowing costs and inflationary pressures. Any deviation from expectations could influence Fed policy expectations, sending the USD in the respective side.

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Skerdian Meta
Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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