US retail sales unexpectedly rise, lowering odds for big rate cut

US retail sales unexpectedly rose last month — a surprisingly strong result that likely lowers the odds for a large rate cut this week from the Federal Reserve.

Data released on Tuesday by the Commerce Department showed that the value of retail purchases rose 0.1% in August — surpassing economists’ forecasts for a 0.2% drop — as cash-strapped consumers showed resilience in the face of a wobbly economy.

Last month’s surprise increase came after a revised 1.1% gain in July, Commerce Department data showed Tuesday. Excluding autos and gasoline stations, sales rose for the fourth straight month.

Five of the13 major sales categories tracked by the report posted increases, while others including electronics and appliances, clothing and furniture fell.

The better-than-expected numbers — which reflect solid household demand even as hiring and wage growth have lately shown signs of leveling off — come as traders hope the Federal Reserve will issue highly-anticipated interest rate cuts after their policy meeting Wednesday.

The surprise retail sales growth has further muddied the picture for traders – 70% of whom previously indicated they believed the Fed would issue a 50-basis point cut, according to CME FedWatch.

“The decision is complicated by conflicting signals of solid economic activity but a weakening labor market,” Principal Asset Management’s Seema Shah told CNBC. “Rarely have market expectations been so torn, so close to a [Federal Open Market Committee] meeting.”

While interest rate cuts are not out of the question, analysts are now predicting a quarter-point cut is more likely, according to the CNBC report.

They would be the first interest rate cuts since 2020, after the Fed issued a series of interest rate hikes in 2022 and 2023 that dampened demand and stunted the labor market.

Retail sales excluding auto and gasoline rose 0.2%, below estimates of 0.3%. Sales excluding volatile categories increased 0.3% in August, in line with estimates.

Falling prices at the pump fueled a drop in sales at gasoline service stations.

The national average price for a gallon of gas was $3.20 on Tuesday – below average prices of $3.42 a month ago but still stubbornly high, according to AAA.

Stocks rose Tuesday following the better-than-expected data.

The S&P 500 was up 0.4% mid-morning, while the Dow Jones ticked up 0.3% and the Nasdaq 100 increased 0.6%.