This is generally a good report for the Fed and potentially good news for mortgage rates, but there is an important wrinkle.

July retail sales fell 0.6%, versus expectations for a 0.1% gain. It was the first monthly decline in nine months. More importantly, the control group, which is used as an input into GDP calculations, fell 0.4%.

What does it mean?

1. The consumer is starting to slow down.
Consumer spending has been one of the stronger parts of the economy. A significant miss like this suggests households may be becoming more cautious with their money.

2. This adds to the argument that the economy is cooling.
Put this together with the weak July jobs report—23,000 jobs lost and the downward revisions to May and June, and we have several indicators pointing toward a softer economy.

3. That’s potentially good news for the Fed.
The Fed has been concerned about inflation, but it also has a mandate to support employment. If inflation is coming down while employment and consumer spending are weakening, the argument for keeping rates elevated becomes less compelling.

4. And that’s where mortgage rates come in.
The Fed doesn’t directly set mortgage rates, but expectations for future Fed policy influence Treasury yields and mortgage-backed securities. A cooling economy can ultimately create a more favorable environment for mortgage rates.

But here’s the catch…

The market didn’t simply look at the headline and say, “Great, rates are going down.” Some of the weakness was influenced by lower gasoline prices, the timing of Amazon Prime Day moving into June, and other temporary factors. Retail sales are also measured in dollar terms and aren’t adjusted for inflation.

So I would characterize today’s report as:

Weak consumer + weak jobs + cooling inflation = increasingly difficult argument for Fed rate hikes.

But it doesn’t guarantee lower mortgage rates immediately. The market still has to weigh inflation expectations, Treasury supply, geopolitical risk, and what the Fed believes the data means.

For your mortgage commentary, the clean takeaway is:

The Consumer Is Finally Showing Some Cracks.
Retail sales were expected to rise 0.1%. Instead, they fell 0.6%. Combine that with weak employment numbers and cooling inflation, and the economy is sending the Fed a pretty clear message: the consumer is slowing down.

That’s exactly what we need to see if we’re looking for a path toward lower Fed rates and eventually, lower mortgage rates.

Have a fantastic weekend and always feel free to reach out to our team.

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