Key Takeaways
1. Consumer Spending Unexpectedly Softens in July
Retail and food-service sales fell -0.6% month-over-month after rising just +0.2% in June. Unlike in June, July’s weakness was broader than gasoline alone, with sales excluding autos and gasoline declining -0.2%. A portion of July’s decline likely reflected the timing of Amazon’s Prime Day sales event in late June, which may have pulled forward online purchases. Despite the slowdown, consumers continue to spend. Total retail sales were +5.0% above a year ago, while restaurants and several store categories posted gains.
Why it matters: The past two months point to a consumer who is still spending, but at a more moderate pace compared to earlier in the year.
2. Consumer Sentiment Weakens in Early August Due to Persistent Inflation Concerns
The University of Michigan’s sentiment index fell to 51.0 from 55.2 in July, reversing two months of improvement. Only 8% of consumers said they expected their income growth to outpace inflation over the next year, down from 18% in December, as higher prices, including energy costs, continued to weigh on purchasing power.
Why it matters: Sentiment doesn’t always translate directly into spending, but weaker confidence and persistent concerns about purchasing power suggest the consumer may be softening.
3. Higher Oil Prices and a Cautious Federal Reserve Complicate the Interest Rate Outlook
Oil prices moved higher again this week as tensions around the Strait of Hormuz raised concerns about energy supply. Higher energy costs can pressure consumer purchasing power while also adding to inflation, complicating the Federal Reserve’s policy outlook. Minutes from the Fed’s July meeting showed policymakers remain concerned about inflation, with some officials open to additional tightening if price pressures don’t improve.
Why it matters: Softer consumer data would normally strengthen the case for lower interest rates, but higher energy prices and persistent inflation could limit how quickly the Fed is able to respond.
4. Long-Term Treasury Yields Aren’t Behaving as They Typically Would When Growth Softens
The 30-year Treasury yield climbed above 5.30% this week, its highest level since 2007, even as retail sales and consumer sentiment weakened. Softer growth would typically increase demand for Treasuries and push yields lower. However, inflation concerns and heavy government borrowing continue to put upward pressure on long-term rates.
Why it matters: If this relationship persists, longer-maturity Treasury bonds may not provide the same degree of portfolio protection they have historically offered during periods of weaker growth.
5. Volatility Increases as Stocks Respond to Higher Interest Rates
Rising Treasury yields created a challenging backdrop for equities this week, particularly for areas of the market that trade at higher valuations. Higher bond yields give investors a more attractive alternative to stocks, which can put downward pressure on equity valuations as stocks compete with higher-yielding bonds. Stocks have remained relatively resilient despite the rise in interest rates, but the move in rates has contributed to increased volatility.
Why it matters: Higher interest rates can be a potential headwind for equities. However, rates are only one factor influencing market direction, with earnings growth and the economy also impacting forward returns.
