Retail sales accelerated from the recent trend of moderate growth in July, as Amazon Prime Day and related sales provided a boost. The data followed the first in a wave of big retail earnings reports this week, as Home Depot topped Q2 forecasts but saw sales slip 2% amid "pressure on certain big-ticket, discretionary categories." After the retail sales data, S&P 500 futures continued to point solidly lower in Tuesday morning's stock market action.
The strength of the U.S. consumer will continue to be in focus this week with earnings due from Walmart on Thursday and Target tomorrow.
The strong retail sales data is a negative for stock market sentiment at a time the S&P 500 rally has come under some pressure and the 10-year Treasury yield is nearing its highest level since 2007.
Retail Sales Expectations
July retail sales rose 0.7% overall and 1% excluding autos. Wall Street expected both categories to rise 0.4%.
Plus, July's strength came as modest growth in June was revised up slightly to 0.3% from 0.2%.
Nonstore retailers saw sales grow 1.9% on the month, leading all categories, and revenue rose 10.3% from a year ago. Sales at bars and restaurants rose 1.4% from June and 11.9% from a year ago. Furniture stores sales fell 1.8% and sales at electronics and appliance stores slid 1.3%.
Auto-related sales slipped 0.3%, while gas station sales edged up 0.4%, but remained 20.8% below year-ago levels.
In a preview, Ian Shepherdson, chief economist at Pantheon Macroeconomics, highlighted potential for an upside surprise due to seasonal adjustment challenges stemming from the timing shift in Amazon Prime Day in 2020 and 2021.
Reaction Of S&P 500, Treasury Yields
After the retail sales data, S&P 500 futures were off 0.6%, about where they stood prior to the data. The 10-year Treasury yield rose 5 basis points to 4.23%, the highest level since last October.
Signs of economic strength risk taking the wind out of the S&P 500 rally sails as higher Treasury yields rein in optimism. All things equal, a higher 10-year Treasury yield implies lower equity valuations, particularly for growth stocks, based on analysts' models that discount future earnings back to the present based on the 10-year Treasury yield.
Thus far, the stock market has weathered the recent run-up in Treasury yields pretty well, partly because it's not expected to last. The bet is that the recent disinflationary trend will allow the Fed to stop hiking its benchmark interest rate and achieve a soft landing for the U.S. economy.
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Student Loan Repayment Dims Retail Sales Outlook
Consumption started the year on a strong note, helped by an 8.7% cost-of-living increase from Social Security. But the recent trend had been ho-hum, despite solid wage growth and a strong S&P 500 rally. That's because households have spent down most of the excess savings they stocked away during the pandemic thanks to government largesse and ultralow mortgage rates. Now the savings rate as a percentage of disposable income is gradually rising, detracting from current spending, while high interest rates also are a drag on consumption.
On Monday, S&P Global Market Intelligence predicted that back-to-school sales will grow 1.8% to $978 billion this year. On a real basis, sales are seen rising 1.5%. That adjusts for an expected 0.3% rise in back-to-school goods prices, down sharply from last year's 5.9% price rise.
If economic data surprises to the upside in the near term, that may cast some doubt on expectations that growth will slow and long-term Treasury yields will come down. Yet there's some reason to think the consumer could be about to downshift further.
A key reason is the end of the student loan payment moratorium. With the first payments due in October, Deutsche Bank has estimated that renewed student loan payments could cut spending by up to $14 billion per month, or $305 per borrower.
Yet President Biden announced that the federal government won't report delinquencies for the first year. Meanwhile, the Biden administration has offered hope to borrowers that a new loan-forgiveness plan under development can overcome legal challenges. Lastly, a new repayment plan would limit liability to 10% of income above $33,000 in annual earnings, or about a $15 hourly wage. That would save many borrowers $1,000 per year.
