US Retail Sales Ex Autos and Gas: The Credit Buffer Test

A 0.2% drop in core retail sales signals a cooling consumer, but the real story is how high-yield desks are pricing the divergence from German industrial weakness.

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Key Points

Core retail sales fell 0.2% in July, a deceleration from the prior 0.4% gain.
High-yield desk traders are using the data to test the US consumer’s role as a buffer against global manufacturing weakness.
The divergence between soft German industrial orders and resilient US spending is the key variable for credit spreads.
The US consumer is currently a buffer, but the margin for error is shrinking as the global manufacturing slump deepens.

What To Watch

The August retail sales report, due in September, to see if the decline accelerates.
High-yield credit spreads for companies with high exposure to discretionary consumer goods.
Further declines in German industrial orders, which would signal a deepening global manufacturing slump.

Market Analysis

How the tape may move from the last update’s mark — not from the open, and not the session % already printed.

The US consumer is currently a buffer against a global manufacturing slump, but the margin for error is shrinking. If the global manufacturing slump deepens, the US consumer will eventually feel the impact, and the credit story will shift from a buffer to a lagging indicator of a recession.

Expected Move From Here -1.5% to +2.0% From last update, not from the open

Certainty 62%

Why

The buffer thesis is wrong if the August retail sales report shows an accelerating decline, or if high-yield credit spreads for discretionary consumer goods widen significantly, indicating that the market is pricing in a near-term US recession.