Retail Sales Beat Expectations as Fed Signals Higher Rates Ahead

This week’s economic data includes: (1) retail sales for May, (2) the June Federal Open Market Committee (FOMC) meeting, (3) weekly initial jobless and continuing claims, and (4) market trends across equities, oil and Treasury markets along with rate-cut expectations.

KEY SUMMARY:

Retail sales rose strongly in May with broad-based gains and resilient core demand, supported by solid job growth, higher tax refunds, and wealth effects, while the increase in the control group points to a meaningful boost to second-quarter GDP

Retail sales rose a stronger-than-expected 0.9% in May, marking a fourth consecutive monthly increase and pushing year-over-year growth to 6.9%. The gains were supported by solid job growth, elevated tax refunds, and a rally in equity markets, helping offset ongoing inflation pressures. However, the sustainability of this momentum remains uncertain as real wages continue to decline, the boost from tax refunds begins to fade, and household savings trend lower. Overall, the report reflects broad-based spending and continued consumer resilience, even amid higher gasoline prices linked to geopolitical tensions.

Category performance was broadly positive, led by gasoline stations, non-store retailers, and motor vehicle dealers, which together accounted for the majority of the monthly increase. Non-store sales were likely boosted by consumers seeking promotions and discounts. Core retail measures remained firm, with sales excluding autos and gasoline holding steady and coming in above expectations. The control group, which feeds directly into GDP, rose 0.7% in May, signaling a solid contribution to second-quarter economic growth and reinforcing the underlying strength in consumer demand.

The Fed held rates steady at 3.50%–3.75% while signaling a more hawkish outlook, highlighting resilient economic activity and a stable labor market alongside elevated inflation, with the dot plot pointing to potential rate hikes and a more cautious policy stance ahead.

The FOMC unanimously held the federal funds rate steady at 3.50%–3.75% under new Chair Kevin Warsh, noting that the economy continues to expand at a solid pace despite elevated uncertainty. The Fed pointed to strong productivity and capital investment, along with a stable labor market where job gains are keeping pace with labor force growth. At the same time, policymakers emphasized that inflation remains elevated and reaffirmed their commitment to returning it to the 2% target. Warsh also announced the formation of multiple task forces to review key areas such as the Fed’s balance sheet, communications, data, productivity, and the inflation framework, with recommendations expected by year-end.

As compared to March, the June Summary of Economic Projections (SEP) showed higher inflation, slower growth, lower unemployment, and a shift toward a rate hike in 2026 versus a prior expectation of cuts. The dot plot conveyed a more hawkish message, with more than half of officials anticipating one or more hikes this year, eight expecting no change, and one projecting a rate cut. Longer-term projections pointed to higher policy rates, elevated near-term inflation, and modestly slower—but still solid—growth alongside a stable labor market, reinforcing a more cautious policy stance. Although Chair Warsh did not submit a dot, his tone during the press conference aligned with the broader hawkish message.

Weekly initial jobless claims declined and remain historically low, signaling a resilient labor market, while rising continuing claims suggest it is taking somewhat longer for unemployed workers to find new jobs.

Initial jobless claims declined modestly to 226,000, remaining below year-ago levels for an eighteenth straight week, while the four-week average ticked higher, signaling a labor market that remains steady and resilient. At the same time, continuing claims rose to 1.795 million—the highest since late March—and their moving average also increased, suggesting it is taking unemployed workers somewhat longer to find new jobs, even as overall labor conditions remain relatively strong.

Markets posted modest gains despite volatility, as easing U.S.–Iran tensions drove a rebound in equities, a sharp drop in oil prices, lower Treasury yields, and pushed out Fed rate hike expectations.

Equity markets posted modest gains for the holiday-shortened week, rebounding from a midweek sell-off triggered by a hawkish Fed signal pointing toward higher interest rates rather than cuts later this year. Sentiment improved sharply on Thursday after news of a U.S.–Iran interim agreement to reopen the Strait of Hormuz, easing energy price pressures and supporting risk assets. The Nasdaq led the market gains, driven by a strong rally in semiconductor stocks, while all major indices continued to show solid year-to-date performance.

Oil markets moved significantly lower, with crude prices falling roughly 8% on expectations of increased supply following the Iran agreement and a gradual normalization of global flows. Both Brent and West Texas Intermediate (WTI) crude posted sharp weekly declines, with futures markets also trending lower across 2026 and 2027 contracts, although prices remain above pre-conflict levels. Gasoline prices declined modestly at both the national and California levels, but remain elevated compared to pre-conflict levels, highlighting the lingering impact of earlier supply disruptions.

In fixed income, Treasury yields were volatile but ended with higher short-term rates and a flatter yield curve, reflecting a more hawkish Fed outlook. While easing oil prices helped temper inflation concerns somewhat, markets significantly repriced rate expectations, now anticipating a near-term hike as early as September or October, followed by another in March 2027 and a potential rate cut by July 2027. Overall, the week reflected a shift toward tighter policy expectations, partially offset by improving geopolitical and energy dynamics.

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DETAILED ANALYSIS:

Retail Sales – May Update:

Overview:

Retail sales rose 0.9% month over month in May, accelerating from April’s downwardly revised 0.4% increase and exceeding market expectations of 0.6%. On a year-over-year basis, sales were up 6.9%.

This marks a fourth consecutive month of growth, supported by stronger job gains, elevated tax refunds, and a rally in equity markets—all of which helped offset rising inflationary pressures. That said, the durability of this momentum remains uncertain as real wages continue to decline, the boost from tax refunds begins to fade, and household savings trend lower. Overall, the May report points to broad-based spending and continued consumer resilience, even amid higher gasoline prices tied to geopolitical tensions.

Category Performance:
Performance was broadly positive, with 9 of the 13 major retail categories posting monthly increases and 2 remaining unchanged. Notable gains included:

• Gasoline stations: +3.4% MoM (+26.5% YoY), contributing ~31% of the total monthly increase and marking a fourth consecutive monthly gain
• Non-store retailers: +1.5% (+12.2% YoY), contributing ~30% of the increase and extending gains to a fifth straight month, likely driven by consumers actively seeking promotions and discounts
• Motor vehicle and parts dealers: +1.2% (+4.4% YoY), contributing ~24% of the increase and reaching the highest level since July 2025

These gains were partially offset by weakness in two categories:

• Electronics and appliance stores: -0.5%, reducing the overall monthly gain by ~0.6%
• Food services and drinking places: -0.1%, weighing on the total by ~2.3%, following a strong 0.9% increase in April

Meanwhile, food and beverage stores, along with building materials and garden equipment and supplies dealers, were flat on the month.

Core Retails & Control Group:
Core retail measures remained firm:

• Retail sales excluding gasoline increased 0.7% MoM, up from 0.2% in April
• Retail sales excluding autos rose 0.8% MoM, up from 0.7% and above expectations of 0.6%
• Retail sales excluding autos and gasoline increased 0.5%, unchanged from April and above expectations of 0.3%

These readings suggest underlying consumer demand remains resilient, even after adjusting for volatility in autos and gasoline.

The control group—which excludes food services, autos, building materials, and gasoline and feeds directly into GDP—rose 0.7% MoM in May, up from 0.5% in April and above expectations of 0.4%, pointing to a solid contribution to second-quarter GDP growth.

June 16-17 FOMC Meeting:

The FOMC voted unanimously to keep the benchmark federal funds rate unchanged at a target range of 3.50%–3.75% under new Chair Kevin Warsh. In its notably shorter post-meeting statement, the Fed highlighted that economic activity continues to expand at a solid pace despite elevated uncertainty, partly driven by the Iran conflict. Productivity growth and capital investment remain strong, while job gains have kept pace with labor force growth, leaving the unemployment rate largely unchanged and signaling a stable labor market. The Committee also reiterated that inflation remains elevated and affirmed its commitment to achieving its 2% target.

During the press conference, Chair Warsh—who has emphasized reform at the Fed—announced the creation of several task forces to review five key areas: the Fed’s balance sheet, communications, data sources, productivity and employment, and the inflation framework. These efforts will include external experts and are expected to deliver findings by year-end.

The Fed also released its quarterly SEP. Compared with March, the June SEP reflected higher inflation expectations, slower economic growth, lower unemployment, and a shift toward one rate hike in 2026 (versus a projected rate cut previously). Of the 19 FOMC participants, 18 submitted rate projections for the dot plot; Chair Warsh did not, consistent with his preference for providing less forward guidance.

The dot plot showed a more hawkish tilt, with nine officials expecting at least one 25-basis-point hike this year and six anticipating at least two hikes. Eight participants projected no cuts, while only one expected a single cut. With roughly half the Committee leaning toward a tighter policy path, the overall message to markets was clearly hawkish. Despite not submitting his own projection, Chair Warsh’s tone during the press conference was also notably hawkish.

Key takeaways for the SEP:

1. Federal Funds Rate Projections (Dot Plot)
   • 2026: 3.8% (up from 3.4%)
   • 2027: 3.6% (up from 3.1%)
   • 2028: 3.4% (up from 3.1%)
   • Long-run neutral rate: 3.1% (unchanged)
2. GDP Growth

• 2026: 2.2% (down from 2.4%)
• 2027: 2.3% (unchanged)
• 2028: 2.2% (up from 2.1%)
• Long-run growth rate: 2.0% (unchanged)

3. Unemployment Rate

• 2026: 4.3% (down from 4.4%)
• 2027: 4.3% (unchanged)
• 2028: 4.2% (unchanged)
• Long-run estimate: 4.2% (unchanged)

4. Inflation (Headline PCE)

• 2026: 3.6% (up from 2.7%)
• 2027: 2.3% (up from 2.2%)
• 2028: 2.0% (unchanged)
• Long-run target: 2.0% (unchanged)

5. Inflation (Core PCE)

• 2026: 3.3% (up from 2.7%)
• 2027: 2.5% (up from 2.2%)
• 2028: 2.1% (up from 2.0%)
• Long-run estimate: not collected

Weekly Jobless Claims – Week Ending June 13:

The Labor Department reported that initial jobless claims declined by 4,000 to 226,000 for the week ending June 13, down from 230,000 the prior week and slightly above expectations of 225,000. Claims have now remained below year-ago levels for an eighteenth consecutive week. The four-week moving average rose by 4,000 to 223,250, suggesting the labor market remains steady and resilient.

Continuing claims, which track the number of individuals receiving unemployment benefits, increased by 24,000 to 1.795 million for the week ending June 6, coming in above expectations. While this marks the highest level since late March, it remains well below the 1.935 million level seen a year ago. The insured unemployment rate held steady at 1.2%, while the four-week moving average edged up by 9,750 to 1.788 million—indicating it is taking somewhat longer for unemployed workers to find new jobs.

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WEEKLY MARKET ANALYSIS:

Equity Market

Equity markets ended the holiday-shortened week ending June 18, 2026 with modest gains, rebounding from a Wednesday sell-off triggered by a hawkish Fed policy update that signaled a shift toward higher interest rates rather than cuts later this year. Markets staged a strong recovery on Thursday following news that the U.S. and Iran signed an interim peace framework aimed at reopening the Strait of Hormuz, which helped ease energy prices. The tech-heavy Nasdaq led weekly gains, driven by a strong rally in semiconductor shares on Thursday.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: +2.43% (weekly) & +14.09% (YTD), closing at 26,518
• S&P 500: +0.93% (weekly) & +9.57% (YTD), ending at 7,501
• Dow Jones Industrial Average: +0.71% (weekly) & +7.28% (YTD), closing at 51,565
• Russell 2000: +1.22% (weekly) & +20.06% (YTD), ending at 2,978

Oil Market and Gasoline Price

For the week ending June 18, 2026, crude oil prices declined meaningfully—down roughly 8%—primarily driven by a memorandum of understanding to end the Iran conflict and reopen the Strait of Hormuz, raising expectations for a gradual normalization of flows and the return of Iranian supply to the market. Brent crude fell $8.10 (9.28%), from $87.33 to $79.23 per barrel, while West Texas Intermediate (WTI) declined $8.28 (9.75%), from $84.88 to $76.60 per barrel.

In the futures market, December 2026 Brent crude is priced at $77.29 per barrel, down $5.29 (6.41%) week over week from $82.58, while WTI stands at $72.57, down $4.84 (6.25%) from $77.41. Relative to current spot prices, December 2026 Brent is lower by $1.94 (2.45%), while WTI is down $4.03 (5.26%).

Further out the curve, December 2027 contracts posted more modest weekly declines, with Brent at $73.15 (down $3.21, or 4.20%) and WTI at $68.87 (down $2.99, or 4.16%). Despite the recent pullback, prices remain above the pre-conflict low-$60 range.

On the consumer side, U.S. average gasoline prices declined by $0.11 to $3.99 per gallon, according to AAA. However, prices remain elevated—up $1.02 (34.01%) from $2.98 per gallon at the onset of the Middle East conflict in late February 2026.

According to the Department of Energy, California’s average price for regular gasoline edged down $0.14 (2.49%) to $5.55 per gallon for the week ending June 15. Even with the recent decline, prices remain $1.08 (24.11%) above pre-conflict levels of $4.48 per gallon.

Treasury Market

Treasury yields were volatile during the week but ultimately ended with higher short-term rates and a flatter yield curve, primarily driven by a hawkish Federal Reserve stance that increased the likelihood of rate hikes later this year. This was partially offset by news of a U.S.–Iran interim agreement to reopen the Strait of Hormuz, which pushed crude oil prices lower and helped ease some inflation concerns.

Key Treasury Yield Movements:

• 2-year yield: 4.19% (+0.10%)
• 5-year yield: 4.23% (+0.02%)
• 10-year yield: 4.46% (-0.02%)

Rate Cut Expectations

In the prior week, markets had fully priced in a 25-bp hike in January 2027, with very little expectation of any additional hikes. This week, however, expectations shifted meaningfully—markets now fully price in a 25-bp hike as early as October, with a high probability of 89% for a move in September. Additionally, another 25-bp hike is priced in for March 2027 with a strong probability of 87%. The likelihood of a subsequent hike fades to 67% by July 2027, effectively implying a 25-bp rate cut at that point. Overall, markets are now anticipating one 25-bp hike as early as September this year, followed by another in March 2027, and then a 25-bp cut in July 2027.

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

• 6/23 (Tuesday)
  • S&P Global US Manufacturing PMI for June
  • S&P Global US Services PMI for June
  • S&P Global US Composite PMI for June
• 6/24 (Wednesday)
  • New Home Sales for May
  • Building Permits for May
• 6/25 (Thursday)
  • Weekly Initial Jobless Claims & Continuing Claims
  • Personal Income, Personal Spending and PCE Price Index for May

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For a visual representation of this week’s economic review, you can view or download the slide deck here:06.19.2026 CBC Weekly Economic Update Presentation Slides

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

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All content available on this material is general in nature, not directed or tailored to any particular person, and is for informational purposes only. Any of its content is not offered as investment advice and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. The information contained herein reflects the opinions and projections of Commercial Bank of California (CBC) as of the date hereof, which are subject to change without notice at any time. CBC does not represent that any opinion or projection will be realized. The information contained herein has been obtained from sources considered reliable, but neither CBC nor any of its advisors, officers, directors, or affiliates represents that the information presented on this material is accurate, current, or complete, and such information is subject to change without notice.