Tuesday, June 14, 2011

Four Scenarios for the US Retail Sales Report

Four Scenarios for the US Retail Sales Report : Tuesday key report from the US will be the May retail sales figures. With consumer spending making up a majority of the economy, gauging US spending will give us an important read on the health of the recovery.

Will May show consumers curtailing spending in May? We already know that consumers bought less cars in May, and therefore the headlineretail sales number will be weak.Overall sales are expected to decline 0.3%, after a 0.5% gain in April.

As we can see below, retail sales have been moving in the wrong direction in March and April, cooling as higher gasoline prices cut into discretionary incomes and has undercut momentum in this key sector.

Here is our FXTimes graph of retail sales:

Core sales, which removes the effects of car sales, is expected to rise a pretty tepid 0.3%, following a 0.6% gain in April.

When it comes to US data it is interesting to see the reaction as there are several scenarios that can play out.

1. Poor Data, USD Gains on Safe Haven
If core sales wind up disappointing the forecasts and themselves turn negative as consumers retrenched amid signs of slowdown, the context of investor sentiment during the release will be important. If we are seeing “risk-off” trading prior to the release, a weaker than expected reading would extend such sentiment, which could help the USD to gain at the expense of higher yielders (EUR, GBP) and commodity and growth linked currencies (AUD, NZD, CAD). Other safe havens (JPY, CHF) should also benefit, though against other safe havens the USD would struggle.

2. Poor Data, US Fundamentals Become the Focus, USD Falls
If we enter tomorrow with general risk sentiment positive and “risk-on” trades gaining, a poor report will put focus on the weak pace of the US recovery during the 2nd quarter, and the implications that 2nd quarter growth may be weaker than anticipated. That could cause traders to shun the USD as its fundamentals continue to point to the Fed keeping interest rates at their record low levels further into 2012. Higher yielders and commodity currencies climb against safe haven currencies in this scenario.

3. Better Data, USD Falls on Risk Appetite
If core sales surprise markets to the upside, it could help spark stronger equities and give some boost to commodity prices as domestic demand within the US could only be working through a “soft patch.” That sentiment can undermine the USD considering its sold during times of risk appetite when investors are searching for higher yields.

4. Better Data, US Fundamental Picture Improves, USD Gains
In this scenario the better US data actually boosts the USD as it improves the macro-economic picture of the US, and causes traders to look past the weaker data of late and focus ontheprospect of better data ahead. This would especially be true if the context in the general market heading into the report was one where “risk-off” dominates heading into the report and the USD is in best position to benefit. Of course, a positive retail sales report can have the impact of flipping negative investor sentiment positive, and that would then that would put us into the case of #3.

A few months ago, consumer price data was very important as we were looking at Fed that was maybe ready to raise interest rates this year,dependenton higherinflationreadings. Instead now, the poor data of the past few months has the market pricing in a move in 2Q 2012. A positive report therefore has a better chance to surprise the market, as pessimism currently reigns when it comes to the US economic data.

These theme of US data and how it impacts the USD will become even more interesting as we move further away from the factors that stunted growth in the 1st half of the year – higher energy and food prices, global manufacturing slowdown as a result of Japan’s supply disruptions and the sovereign debt concerns about a Greek default. If global growth struggles and we are generally in more “risk-off” mode, the USD can gain from its safe haven status, but if its fundamentals improve as well, it can also gain as a result of the pricing in of an eventual move to tightening by the Fed. We are far from that at this point, but the conversation will turn that way as we digest the next month or two of data starting with this week’s retail sales report.

Will you be trading the US retail sales report and what reaction to you expect from the market?Can positive US data give some impetus to USD bulls, or will we continue to see disappointing results?
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