Key Takeaways:
US retail sales accelerated more than expected in May, driven by higher gasoline prices tied to the Iran conflict, as consumer spending showed resilience despite elevated inflation.
US retail sales rose 0.9% in May, exceeding the 0.6% consensus estimate, as higher gasoline prices from the Iran conflict boosted spending at the pump while underlying consumer demand held steady.
"The consumer continues to spend despite elevated gas prices, which suggests the labor market remains the primary support for household budgets," said Sarah House, senior economist at Wells Fargo.
April's reading was revised down to 0.4% from the initially reported 0.5%. Gas station revenues jumped 3.4% as the Iran conflict pushed pump prices higher. Excluding gas stations, retail sales still rose 0.7%, indicating broad-based demand beyond the energy component.
The stronger-than-expected data reduces the urgency for the Federal Reserve to cut rates aggressively, with overnight index swap markets now pricing a lower probability of a September move. The next Fed decision is scheduled for June 17-18.
The May report marks the second consecutive month of above-consensus retail sales, following April's upwardly revised trajectory. Consumer spending has remained a pillar of the US economy even as the Iran conflict drove gasoline prices to multi-month highs, with the national average pump price rising above $3.80 a gallon in May, according to AAA data.
The resilience in consumer demand complicates the Fed's policy calculus. Policymakers have been watching for signs of a slowdown that would justify rate cuts, but the May data suggests households are still drawing on pandemic-era savings and a tight labor market to sustain spending. Nonfarm payrolls have averaged 232,000 per month over the past three months, well above the 100,000 breakeven rate estimated by the Atlanta Fed.
The last time retail sales exceeded consensus by a similar margin was in January, when a 0.8% print versus 0.3% expected preceded a 25-basis-point hold at the March Fed meeting. The S&P 500 rose 1.2% in the week following that release as markets interpreted the data as a sign of economic strength rather than an inflation risk.
Treasury yields moved higher after the release, with the two-year note climbing 4 basis points to 4.12% and the 10-year yield rising 3 basis points to 4.35%. The dollar index gained 0.2% against a basket of major currencies. Equity futures pared earlier losses, with S&P 500 futures turning flat after the data.
Looking ahead, the May personal consumption expenditures price index, due June 27, will provide the next major test of whether consumer demand is feeding through to broader inflation. If core PCE accelerates alongside resilient retail sales, the case for a July rate cut weakens further.
This article is for informational purposes only and does not constitute investment advice.
