Today, we’re looking at the US retail sales data for July. Analysts expect retail sales to rise by +0.5% from June, which had a +0.6% increase. Sales numbers, excluding cars, are predicted to rise by only +0.3%. The control group is also expected to increase by +0.4%, showing that consumers are still resilient.

Impact of Auto Sales

Auto sales and higher prices may impact retail sales significantly. These factors might mask a drop in overall consumer spending, yet the outlook remains optimistic. Unless the actual data diverges significantly from expectations, it should reinforce the idea of healthy consumer activity. Morgan Stanley believes retail sales will exceed estimates, forecasting a +0.8% increase, partly due to a +3.4% rise in auto sales. They anticipate a +0.4% rise in the control group, supported by income growth and moderate inflation. With a 25 basis point rate cut expected in September, positive results would align with predictions, showing stable consumer resilience. This scenario would help maintain the Federal Reserve’s current stance without raising economic alarms. As we await the July retail sales data, we’re curious to see how US consumers are doing. Markets want a “Goldilocks” number—not too strong and not too weak—so that the September rate cut remains a possibility. For derivative traders, a report close to the +0.5% consensus could reduce market volatility, making strategies like selling short-dated strangles on the SPX index appealing. This expectation is backed by recent economic reports from this summer. The July Consumer Price Index indicates that inflation has cooled to a 2.8% annual rate. Additionally, the latest jobs report showed a gain of 190,000 positions, with wage growth steady at 3.9%. This combination of easing inflation and a solid job market supports the market’s expectation of a 25 basis point cut from the Fed next month.

Analyzing Consumer Strength

We should look beyond the main figure. A significant jump in auto sales might obscure weaknesses in other areas. If the control group number, which affects GDP, falls short, it could signal trouble, even if the headline number looks good. In that case, we might consider buying puts on consumer discretionary ETFs to hedge against a potential decrease in consumer strength. This situation is reminiscent of the “insurance cuts” the Fed implemented in 2019 when the economy was slowing but not in crisis. If today’s report confirms a gentle slowdown, implied volatility for interest rate options could decline after the September meeting. A prudent approach for the coming weeks might involve positioning for that calm by selling volatility on futures set for October expiration. Create your live VT Markets account and start trading now.

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