Often considered an afterthought compared to the juggernauts of economic indicators — such as the Consumer Price Index (CPI) inflation and job market report — retail sales data rarely moves the needle for Federal Reserve policymakers.

But this Tuesday, the August retail sales numbers could mean something as they land just before the Fed’s two-day Federal Open Market Committee (FOMC) meeting, where a pivotal interest rate decision is on deck for Wednesday.

A rate cut on Wednesday is already a done deal; the real uncertainty is how big that will be. The markets are currently placing their bets on a 60% chance of a 50-basis-point cut and a 40% chance of a more modest 25 basis-point reduction, as per CME FedWatch tool.

Bank of America economist Stephen Juneau doesn’t believe recent economic data justify a large rate cut. Yet, he conceded that “a very weak retail sales report could drive the Fed to start large.” According to Juneau, a -1% figure with downward revisions would qualify as “very weak.”

The investment bank forecasts a 0.3% monthly decline in overall retail sales, sharply below the more optimistic Bloomberg consensus of a 0.2% increase.

If BofA’s gloomy predictions come to pass, it could be enough to tilt the Fed’s hand toward a heftier rate cut.

Bank of America highlighted that the uncertainty around this FOMC meeting is unprecedented, at least since 2015.

“The market uncertainty over 25bp or 50bp means that the meeting will be a trading catalyst,” analysts wrote.

To help traders navigate these stormy waters, BofA unveiled a matrix for different retail sales and FOMC outcomes.

If retail sales come in strong and the Fed takes a dovish stance, it’s time to own cyclicals. However, if sales are weak and the Fed leans hawkish, it might be wise to retreat into defensives.

“Rate-sensitive sectors-manufacturing and housing have certainly been adversely affected by the Fed’s actions,” the investment bank stated.

These rate-sensitive sectors have borne the brunt of the Fed’s previous rate hikes. It’s been 23 months since the ISM Manufacturing PMI last posted two consecutive months above 50, marking the second-longest slump on record. The housing market isn’t faring much better, with existing home sales plunging nearly 40% year-over-year at their lowest point.

According to Bank of America, easing rate pressure should lead to at least a modest pickup in manufacturing and housing activity, potentially boosting earnings growth for the S&P 500 into 2025.

In light of this view, analysts indicated: “We prefer sectors that can benefit from easing rate pressure. We are overweight Financials, Consumer Discretionary, Real Estate and Utilities.”

Utilities, as tracked by the Utilities Select Sector SPDR Fund XLU, were upgraded from Market-Weight to Overweight earlier this month, reflecting a more bullish outlook on quality and income-generating companies.

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This image was created using artificial intelligence MidJourney.