TradingKey - The latest US July retail sales data came in significantly weaker than market expectations. US retail sales fell 0.6% month-on-month in July, compared with a 0.2% increase in June, while the market had previously expected modest growth to continue in July. The data shows that after relatively strong consumer spending in the second quarter, US consumers turned noticeably more cautious at the start of the third quarter.

Retail sales are a key indicator for tracking US household goods consumption. US consumers have recently been pressured by factors such as high interest rates, rising energy prices, and sluggish real income growth. In particular, after Middle East tensions pushed international oil prices higher again, US gasoline prices rebounded noticeably, further squeezing household disposable spending on other goods. Previously released July CPI data showed US headline inflation at 3.4% year-on-year, down from 3.5% in June, but still well above the Federal Reserve's 2% long-term target.

The weak retail sales also echo the recent cooling in the US labor market. Consumption has long been the primary driver supporting US economic growth, and if retail sales continue to weaken in the coming months, it could suggest that high interest rates are increasingly dampening household demand.

For the Federal Reserve, the latest data further reduces the need for another rate hike in September. The July CPI and PPI figures released this week both pointed to cooling inflation, with the July PPI remaining unchanged month-on-month, below market expectations of a 0.2% increase. With retail sales now also coming in well below expectations, the Fed's policy trade-off between inflation and economic growth is shifting further toward addressing the risks of slowing demand and employment.

Markets will next turn their attention to the upcoming University of Michigan consumer sentiment and inflation expectations data to gauge whether consumer willingness to spend has dropped further. If consumption, employment, and inflation continue their cooling trend simultaneously, market expectations for the Fed to hold interest rates steady in September could strengthen further.

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