The United States Redbook Index rose 9% year on year in the week ending 22 May. That compares with a prior reading of 8.1%, pointing to firmer annual growth in tracked retail sales.
The move marks an increase of 0.9 percentage points from the previous rate. The index is watched as a high-frequency gauge of consumer spending trends in the US.
Consumer Strength and Fed Policy Implications
We see this latest Redbook number as a clear sign of continued consumer strength. The acceleration to 9% suggests spending momentum is not fading as some had feared. This robust demand is a key pillar for the economy right now.
This consumer resilience likely puts upward pressure on inflation, a concern given April’s Core CPI still registered 3.6%. Consequently, we believe the Federal Reserve will remain hawkish, pushing back against market expectations for rate cuts. Fed funds futures already show the probability of a September cut has fallen to just 25% over the last few weeks.
Market Positioning and Volatility Strategies
We are looking at call options on consumer discretionary and retail ETFs, such as the XRT, to capitalize on this trend. With the XRT already up over 12% this year, we might use bull call spreads to define our risk. This allows us to participate in further upside driven by strong earnings reports.
The prospect of higher-for-longer interest rates makes us cautious on fixed income. We are considering put options on Treasury futures to hedge against or speculate on a rise in the 10-year yield back towards the 4.5% level. This is reminiscent of past periods where strong economic data forced the bond market to reprice Fed policy quickly.
This tension between a strong economy and a hawkish Fed could lead to increased market choppiness in the coming weeks. We view VIX call options as an inexpensive way to hedge our long positions against a potential market sell-off. Any hawkish surprise from the Fed in their next meeting could cause volatility to spike from its current low levels.
