US Retail Sales Performance
Retail sales, excluding both gas and autos, recorded a 0.2% increase, lower than the previous month’s revised growth of 0.6%. The control group of retail sales saw a growth of 0.5%, above the expected 0.4%, with the prior figure revised to 0.8%.
Year-over-year, retail sales saw an increase of 3.92%, down from a revised 4.35% the month before. While retail sales matched predictions, growth exhibited a decrease compared to the revised data from the prior month.
The July retail sales numbers, while meeting expectations, point toward a consumer who is beginning to pull back. The strong upward revisions for June 2025 tell us spending was more resilient than we thought, but the year-over-year growth has now clearly slowed. This suggests the momentum that carried us through the first half of the year is starting to fade.
Consumer Slowdown and Inflation Impact
We see this consumer slowdown happening while other data points to persistent inflation, with the last Consumer Price Index report showing core inflation still elevated at 3.8%. This puts the Federal Reserve in a tough spot, as it balances fighting inflation with preventing a sharp economic decline. With the market currently pricing in a 50% chance of a rate cut by December, this kind of mixed data only adds to the uncertainty.
Given this slowing trend, we should watch for weakness in consumer discretionary stocks. Traders may consider buying put options on retail ETFs, which would profit if these consumer-focused sectors decline in the coming weeks. This is a direct play on the idea that spending on non-essential items will be the first to drop.
The uncertainty surrounding the Fed’s next move is likely to increase market choppiness. This makes positioning for higher volatility an attractive strategy, perhaps through buying options on the VIX index. We are betting on bigger market swings, not necessarily a specific direction, as investors digest this conflicting economic data.
This situation mirrors periods we saw back in 2023, when speculation about Fed policy drove significant bond market volatility. Consequently, we are monitoring options on Treasury bond ETFs very closely. Any further signs of economic weakness could cause a rush into bonds, making call options a way to profit from a potential drop in interest rates.
