Insights 
VT 
US retail sales in May saw a drop of 0.9%, surpassing the anticipated 0.7% decrease. Despite this, the control group, reflecting consumer behaviour more accurately, improved by 0.4% against a forecasted 0.3%. The prior control figure was revised upwards from a 0.2% decline to a 0.1% decrease.
Further insights from the data reveal that sales excluding autos fell by 0.3%, contrasting with expectations of a 0.1% rise. This was adjusted from a previous estimate of a 0.1% increase to a flat 0.0%. Sales excluding autos and gas saw a dip of 0.1%, having previously shown a 0.2% increase.
Category Specifics
In category specifics, declines occurred in electronics and appliance stores by 0.6%, building materials by 2.7%, and food and beverage stores by 0.7%. Additionally, food services and drinking places faced a 0.9% reduction, whereas clothing and accessories, along with sporting goods and hobbies, each rose by 0.8%.
Restaurant sales showed a notable downturn. Housing-related sectors exhibited decreased vitality, with building materials enduring a 1.1% year-on-year fall, not adjusted for inflation. Preceding the report, year-end Fed pricing was at -49 basis points, adjusting slightly to -48.5 afterwards, with the FOMC meeting ongoing.
These readings are painting a clearer picture, showing weaker-than-expected headline spending, yet a fairly strong core. The divergence between headline retail sales and the control group tells us that while certain sectors are struggling, the foundational consumer activity remains relatively intact. The control group—excluding more volatile components—serves as a more stable indicator for what matters most in GDP calculations. That it’s ticking up, even slightly more than forecast, suggests underlying demand hasn’t fallen off sharply.
We witnessed a broad retreat in spending categories that tend to be more discretionary. Electronics, building supplies, and food services all dipped. Each of these categories shares a common characteristic: reliance on consumer confidence. When this type of spending softens, it’s often a sign consumers are beginning to cut back on non-essentials. Notably, restaurants—a segment that has defied trends over the past year—also saw contraction. It aligns with a pattern where small luxuries are now feeling the pinch.
Market Reaction
However, purchases tied to clothing or hobbies showed modest strength. These gains may not offset the broader slowdown, but they do complicate the narrative of uniformly weakening consumption. It’s indicative of shifts within preferences rather than a blanket pullback. Consumers aren’t necessarily lower on cash, just more selective about where it goes.
We should focus on how the reaction in rates markets was calm, even slightly resilient. The adjustment—from -49 to -48.5 basis points—signals that investors aren’t rushing to change their expectations for year-end rate levels. Despite soft headline data, the core’s sturdiness likely reinforces that view. The market appears to be interpreting the report as mixed, rather than decisively negative or triggering a reassessment.
From experience, it’s during periods of such mixed data—where top-line weakness is met with steady underlying strength—that we find opportunities. It tilts the probability away from sharp policy shifts, while leaving room for volatility around interpretations. With this reading coming mid-FOMC, the messaging that follows from policymakers will carry even more weight than usual.
The housing-adjacent data points are now more subtle tells. With year-on-year declines in building materials, inflation-adjusted or not, we gather that residential activity has lost momentum. It may not yet be reversing outright, but the cooling is hard to ignore. Past cycles have shown that when housing flattens or tilts negative, it often feeds through to wider consumer sentiment and affects longer-term purchasing behaviour.
So, rather than reacting to just this headline miss or the categories in isolation, it becomes more productive to consider where activity is holding and where it is retreating. Particular attention should be directed towards consumption segments that rely on ongoing job gains or real income growth. If those begin wobbling, we know broader corrections aren’t far behind.
Overall, these figures prompt a need to price both possibilities: a persistent core or accelerating softness. As such, the path for volatility pricing may sit somewhere in between – favouring shorter horizons while avoiding overextension in either direction until there’s better clarity.
