The US dollar fell on Friday after data showed U.S. retail sales unexpectedly declined in July, helping send the euro and sterling to multi-month highs as traders weighed Federal Reserve policy. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.25% to 99.67. The euro rose 0.32% to $1.1564 and got to $1.1585, the highest since June 17, while sterling strengthened 0.33% to $1.353, reaching $1.3561, the highest since May 12. As Juan Perez, director of trading at Monex USA noted, "We are clearly having signs of poor consumption. This evidence is clearly showing that there is an economic slowdown in the United States." The retail sales decline comes alongside other concerning economic indicators, including July's payrolls report showing employers unexpectedly shed jobs last month, deepening concerns over the labor market.
US retail sales fell unexpectedly in July, marking their first monthly decline in nine months with a 0.6% drop after increasing 0.2% in June, according to the latest Commerce Department data. The fall was the biggest in 14 months and sharply missed economists' expectations of a 0.1% increase, with the weakness broad across several major categories. The culprit for this surprise drop was a 2.2% decline in online sales in July, which was due largely to Amazon's Prime Day in June, as reported by Investing.com India. Sales at gas stations declined 0.9% in July due to lower prices at the pump, and auto sales declined 1.8% in July and surged in June. Core retail sales, excluding automobiles, gasoline, building materials and food services, fell 0.4% in July, missing economists' expectations of a 0.3% rise. However, some areas of consumer demand remained resilient with apparel sales rising 1.9%, furniture sales rose 0.3%, and spending at bars and restaurants increased 0.5%, indicating that consumers were out and about despite the overall decline. The control group, which excludes volatile items, fell 0.4% versus expectations of a 0.3% gain, with June being revised lower by 0.1 percentage point to 0.4% month-on-month.
The retail sales decline has significantly strengthened market expectations that the Federal Reserve may keep rates unchanged in September, with traders now pricing in just a 31% probability of a September hike, alongside a 69% chance of a rate increase by December, according to Reuters. This represents a substantial shift from before the July inflation data was released, when bets were split between a hike and no change. The softer-than-expected July inflation reading, combined with the retail sales miss, has created a more dovish outlook for monetary policy. Consumer spending had grown at a 3.2% annualised rate in the second quarter, while the US economy expanded at a 1.5% pace. However, as Robert Pavlik, senior portfolio manager at Dakota Wealth noted, "The numbers came in right in line. The market's reaction is slightly positive because the market was fearful it was going to come in worse than it did. You're seeing a market thinking that the Fed is not being pushed toward a rate hike."
While the headline retail sales numbers appeared concerning, some of July's weakness was mechanical rather than outright demand destruction, according to Investing.com India. The boost from large tax refunds earlier in the year had faded, while Amazon moved its Prime Day event from July to June, bringing forward spending that would normally have appeared in July, with other retailers also shifting promotional activity earlier. The July 4 heat wave and a modest post-World Cup hangover appear to have added to the drag, suggesting this is not yet a clean signal that the US consumer has rolled over. Bank of America's card data suggest the familiar K-shaped consumer story may be starting to flatten, with spending growth among lower-income households recently stronger than among higher-income households, while discretionary spending at the top end has cooled modestly. This makes the current retail weakness less of a recession print than the headline initially suggests, as growth is softening just enough to reduce Fed risk without yet collapsing into an earnings problem that would be more concerning for equity markets. The only category to perform well was clothing at +1.9% month-on-month, while health and personal care posted a respectable +0.7% increase. Autos declined 2.4% month-on-month, where higher gasoline prices may have led potential buyers to rethink their decision, and non-store/internet sales fell 2.2%, reflecting a subsequent slowdown after the Amazon Prime Day discounts on June 23-26.
Due to July's lower-than-expected retail sales, economists are expected to trim their third-quarter GDP estimates, as noted by Investing.com India. Currently, the Atlanta Fed is forecasting 5.8% annual GDP growth for the third quarter*. The retail sales decline comes alongside other positive economic indicators, including the Producer Price Index (PPI) remaining unchanged in July, substantially better than economists' consensus estimate of a 0.2% increase, with wholesale food prices declining 0.9% and wholesale energy prices plunging 3.1%. The PCE components in the PPI report actually rose slightly, but Treasury yields meandered lower and should help to take some pressure off the Fed to raise key interest rates. Additionally, gold advanced after the unexpected fall in U.S. retail sales, reflecting broader market uncertainty about economic growth prospects. Retail sales account for 41.5% of total consumer spending, with services such as hotels, airline tickets, insurance, etc. accounting for slightly more. As ING reports, "Higher-income households tend to account for more spending in these areas, and we expect those components to hold up better than retail. Lower and middle-income households have a slight skew towards spending more on physical products, and concerns about job security and squeezed spending power are likely weighing on demand here." A 2.7% household savings ratio, well below the 6% long-run average, and a subdued jobs market with tepid wage growth underscore concerns about continued weakness. Nonetheless, there is scope for a rebound in August and economists continue to predict a 2-2.5% annualised growth rate for 3Q GDP, boosted by an ongoing tech investment boom, after the rather disappointing 1.5% outcome in 2Q.
