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.
As I mentioned earlier this week, a few Federal Reserve members stated that the labor market remains robust and even voted in favor of raising the Fed funds rate. Looking at the recent data, I struggle to see the same level of strength.
Tomorrow’s Bureau of Labor Statistics (BLS) jobs report will be a key market-moving event and could play an important role in shaping the Fed’s thinking on whether to hike, hold, or eventually lower the Fed funds rate.
Recent employment data has pointed toward a labor market that is slowing rather than accelerating:
ADP reported only 44,000 jobs added in July.
Revelio Labs estimated approximately 79,000 new jobs, with 28,000 of those in healthcare, suggesting job growth may be concentrated in a limited number of sectors.
ZipRecruiter, one of the nation’s largest job platforms, noted in its recent earnings report that while the first quarter was relatively stable, hiring activity softened noticeably in the second quarter.
Interesting trends beneath the surface. Hiring rates and quit rates have fallen to levels not seen in many years. That aligns with what job platforms are reporting: fewer openings and a more cautious hiring environment.
At first glance, lower jobless claims and fewer layoffs may suggest a healthy labor market, but it is important to dig deeper. Employers appear to be holding onto existing workers after years of labor shortages, resulting in fewer new job openings. At the same time, workers may be less willing to leave their current jobs because finding a new opportunity has become more difficult.
In other words, the labor market may not be strong…it may simply be frozen.
That is why tomorrow’s BLS report is so important. It will help answer a key question: Is the labor market truly resilient, or is it gradually losing momentum beneath the surface? The answer could have a significant impact on bond markets, mortgage rates, and the Federal Reserve’s next move.
The Consumer Price Index (CPI) measures changes in the prices paid by typical consumers for a “basket” of goods and services. This basket represents everyday expenses, such as food, housing, and transportation.
The key figure often discussed—currently 2.7%—represents the year-over-year change in the cost of that same basket of goods and services.
The sharp spike in inflation during 2021 was largely a reaction to the economic disruptions caused by the COVID-19 pandemic. In 2020, spending slowed significantly due to widespread restrictions, closures of restaurants, hotels, airlines, and reduced travel overall. This near-deflationary period was followed by a dramatic rebound when restrictions eased.
Government intervention also played a role. Massive financial stimulus, including programs like PPP (Paycheck Protection Program) and other incentives, pumped billions of dollars into the economy to sustain businesses and households.
This created a “perfect storm.” As people emerged from lockdowns en masse—comparable to being released from a “chicken coop”—the sudden surge in demand for goods and services outpaced supply, driving prices higher.
The Bond Market reacted as expected with the 10-year treasury auction (monthly) at 1pm ET. High demand means lower Mortgage rates.
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