Will U.S. Consumer Confidence Data Make or Break the Market?

Stocks roared higher as strong U.S. retail sales cooled recession fears. A sentiment report is up next.

• Stock markets cheered as strong U.S. retail sales data marked down recession risk.

• Fed policy bets shifted to reflect diminished rate cut urgency, sending bonds lower.

• The focus now turns to U.S. consumer confidence data for the next inflection point.

Stock markets roared in approval as U.S. retail sales data sailed past economists’ consensus forecasts. Receipts jumped 1% in July after a 0.2% decline in June. Vehicle sales drove the increase. Excluding autos, sales rose by a more modest 0.4%. July CPI data published yesterday revealed a steep year-on-year decline in vehicle prices.

The bellwether S&P 500 stock index is on track for a gain of 1.4% following the data. The tech-tilted Nasdaq 100 is pacing to close up over 2% while the small-cap Russell 2000 has added 2.8%. Treasury bonds fell as the upbeat numbers cooled Federal Reserve interest rate cut expectations, weighing on yields.

Stocks surge as strong retail sales data cools U.S. recession fears

The priced-in probability of a double-sized 50-basis-point (bps) rate reduction at the U.S. central bank’s September meeting—the next time that the rate-setting Federal Open Markets Committee (FOMC) will gather to decide policy—has dropped. It now stands at 25.5%, down from 55% a week ago.

Fed Funds interest rate futures now imply 75bps in rate cuts in 2024, a drop from 104bps recorded amid the market rout last Monday. That amounts to factoring out a full 25bps rate cut from the forecast. That easing has migrated into next year. The outlook for 2025 now envisions 128bps in cuts, up from 105bps seen after last week’s mayhem.

This reshuffling suggests a diminished sense of urgency in deploying stimulus, implying that imminent recession fears have cooled. That’s not surprising in the wake of robust retail sales data. Household consumption is the leading driver of U.S. economic growth, accounting for close to three-quarters of demand.

All eyes on U.S. consumer confidence report

From here, the spotlight turns to the latest survey of consumer confidence from the University of Michigan (UofM). It is expected to show a slight improvement in respondents’ mood in August after hitting an eight-month low in July. The release may help decipher whether last month’s retail sales momentum has scope to continue.

Sentiment was steadily improving as inflation expectations were declining since mid-2022 as the Fed’s rate hike cycle started in March of that year began to bear fruit. That trend held until June of this year, when lower price growth estimates lost their ability to uplift consumers’ mood.

This probably reflects the cooling of the labor market that the Fed itself cited when it switched gears in July to signal the central bank is now “attentive to the risks to both sides of its dual mandate.” This implies policymakers are now about as worried about rising unemployment as they are about inflation.

That narrative pivot marked the latest swing top in the S&P 500 as the markets reckoned that the Fed has become worried about an unwelcome slowdown after four months of increasingly underwhelming economic data (according to analytics from Citigroup). When soft inflation and employment numbers followed, stocks swooned.

With this in mind, soft sentiment data—especially in the context of still-anchored inflation expectations—may take some of the wind out of Wall Street’s sails and put a cap on upward progress, at least for now. On the other hand, a chipper reading echoing the apparent resilience of the retail sales report may furnish her ally with added fuel.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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