WILL RETAIL SALES HELP THE DOLLAR?
The mixed performance of the U.S. dollar today reflects the consolidative mode in the forex market. Traders are waiting for Friday’s retail sales report to see if the turn in the labor market has been accompanied by a turn in consumer spending - because fewer job losses mean nothing if they do not encourage American consumers to part with their dollars. Although the greenback retreated against the commodity currencies, it rose against the euro and Japanese Yen while the British pound remained virtually unchanged. This performance suggests that most traders still want to sell dollars on the hopes that the unambiguously strong non-farm payrolls report last month truly reflects the state of the economy. There is also round of heavy economic data from China this evening. As we have seen in the past, Chinese economic data moves not only the currency markets but also equity markets. With industrial production, retail sales, CPI/PPI and trade numbers are for release, expect a busy night.
Will Consumers Step Up?
The U.S. retail sales report is traditionally one of the most important event risks for the U.S. dollar because consumer spending is the backbone of the U.S. economy and constitutes more than 70 percent of GDP. However this month’s report is even more significant because November is usually a big month for spending because of the holidays. Also, the sharp improvement in the non-farm payrolls report has turned the dollar around but there has been a lot of speculation about the sustainability of those numbers and the recent warning from Ben Bernanke certainly does not provide a vote of confidence for the dollar. Therefore everyone will be looking to the retail sales numbers to see if consumers stepped up in the month of November. Based upon current market forecasts, retail sales are expected to rise for the second month in a row, albeit at a slower pace. Spending on Black Friday and Cyber Monday were stronger than the previous year but consumers are definitely clicking the mouse more often than they are walking into the stores. Black Friday sales increased 0.5 percent while Cyber Monday sales increased 5.0 percent. However despite these healthier numbers, there have been disappointments. Luxury retailer Saks Fifth Ave reported a 26 percent drop in sales while teen retailer Abercrombie and Fitch reported a 17 percent drop. Macy’s and JC Penny both reported monthly sales declines of approximately 6 percent. Based upon the 6 percent rise in sales of Costco and the 3 percent rise in sales at Kohl’s, American consumers are definitely trading down. Therefore we believe that the risks lie with a weaker retail sales report and a disappointing consumer spending report should be dollar bearish. The primary reasons why retail sales are expected to increase at all aside from holiday spending are gas prices and auto sales. A gallon of gasoline averaged above $2.60 the entire month of November, about 10 cents higher than the previous month and even though the cash for clunkers program ran out, car sales are expected to remain steady. If retail sales surprises to the upside like the non-farm payrolls report, the dollar could incur some new upside momentum.
Currency Traders Not Impressed by Stronger Trade Data
After 3 days of little to no U.S. economic reports, the market's focus finally returns to the U.S. economy with the release of trade numbers and jobless claims. The latest trade numbers finally reflect the positive implications of a weaker dollar but unfortunately currency traders were not impressed. In the month of October, the trade deficit fell 7.6 percent to $32.9 billion as exports reached the highest level in more than a year (Nov 2008). Trade with China was particularly strong with exports reaching a record $6.9B which tells us that the U.S. has also been a beneficiary of the recovery in China. Imports increased by only a modest 0.4 percent on demand for computers and autos. The number of barrels of crude oil that was imported in October was the fewest since January 2000. Traders were also disappointed by the rise in jobless claims and the drop in continuing claims. The number of Americans filing for first time unemployment benefits increased 17k to 474k last week. We are not worried about the rise in weekly claims because they can be cyclical and remain at healthy levels. However we are a bit worried by continuing claims which dropped from 5.46M to 5.157M because they reflect expiring benefits.
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