US retail sales beat forecasts in May but falling savings and rising delinquencies signal consumer stress, leaving markets uncertain about spending sustainability.
The S&P 500 fell 0.4% after retail sales details showed a drop in the savings rate and a spike in credit card delinquencies, with consumer discretionary leading the decline. The index gave up early gains as traders reassessed the consumer outlook.
Investors initially cheered the headline beat but then focused on the decline in the savings rate and a jump in credit card delinquencies, sparking fears that consumer spending is on shaky ground.
Consumer discretionary names are most at risk if spending slows, while defensive sectors like utilities outperformed as investors rotated into safety.
Bond yields edged lower as the report's worrying details fueled growth concerns and increased demand for safe-haven assets. The 10-year yield fell 3bps to 4.25%.
Yields fell as investors focused on the worrying signals under the headline sales beat, interpreting the drop in savings and higher delinquencies as recessionary red flags.
The dollar index slipped 0.2% to 99.50 as the retail sales details raised doubts about the U.S. consumer's resilience, potentially delaying rate hikes and reducing the dollar's yield advantage.
The dollar weakened as the report's details painted a less rosy picture of the U.S. consumer, reducing the expected path for Fed rate hikes and thus narrowing rate differentials with other major central banks.
May retail sales rose 0.5% m/m, surpassing the 0.3% consensus, but a drop in savings rate and rising credit card delinquencies cast doubt on the spending outlook. Markets initially rose on the headline but pulled back as details showed households are dipping into savings to maintain consumption. The mixed data leaves the Fed in a wait-and-see mode with a September rate cut still priced at 70%.
Headline sales increased 0.5% month-over-month, exceeding estimates of 0.3%. However, details revealed that consumers financed spending by drawing down savings and increasing debt, raising concerns about the durability of the trend.
The savings rate dropped to 3.2% and credit card delinquencies hit 2.8%, suggesting households are under pressure and that the spending boost may not be sustainable if labor market conditions weaken.
Equities initially rose before turning flat to negative as investors parsed the concerning undercurrents. Bond yields edged lower on growth worries, while the dollar weakened slightly.