Fundamental Fun with Orbex: U.S. Retail Sales

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Typically the week after NFP, the US Census Bureau publishes the retails sales data for the prior month. The data can be price-sensitive and impact foreign exchange rates, as well as equities. There are several bits of data released at the same time, and together they constitute one of the major economic data events of the month.

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Why it matters

Retail sales are a monthly survey of how much retail outlets have sold in the prior month. The data closely resembles total consumer spending, and as consumers constitute the bulk of the US economy, it’s seen as a gauge of overall economic health. An unexpected drop in retail sales can lead to increased inventories, and slowing productivity.

The data is not seen as one of the key factors followed by the Fed, so traders are not typically focused on regulatory implications when analyzing the data. Attention is more on the expectations for the economy; higher retail sales imply increased demand and that can lead to higher inflation and a weaker dollar. Lower retail sales imply increased supply and potentially less inflation.

Retail sales also impact the stock markets; lower retail sales would have a negative on businesses in general, but especially retailers. This can lead the stock markets to underperform – which would normally imply a reduced demand for dollars; hower the US is seen as a safe-haven, and underperformance in the economy can lead, counterintuitively, to a stronger dollar.

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Considerations

In general, better retail sales are understood to support the dollar, both because it shows strength in the economy, as well as increasing sales demand, which implies more demand for dollars. However, a too high number – something way above expectations – could imply the market is overheating, with a potential inflation problem, and raise concerns the Fed could move forward with a rate increase. Counterintuitively, this could lead to market uncertainty and actually be negative for the dollar.

Similarly, if the data comes in way below expectations, despite being a bad sign for the economy as a whole, it could change perceptions about potential regulatory action. It should be noted, however, that the market tends to discount a single data point that comes in radically out of line.

What to look for

The number that gets the headlines is usually Retail Sales E-Auto. This is because auto sales can lead to additional volatility that is somewhat “superficial” to the broader trends within the economy. The data can come with revisions, and often they can move the market as well. Better data generally leads to dollar strength. Current expectations are for retail sales ex-autos to have increased by 0.5%, which would be a little less than last month’s 0.6% increase.

Released concurrently, but second inattention is the whole Retail Sales number. With the impact of the more volatile auto sales, typically it’s not considered unless there is a major discrepancy with the other data, and that would, naturally, have an implication on the auto industry. Expectations at the moment are that retail sales will have increased 0.4% over the prior month, compared to the last reading of up to 0.5%.

Finally, there is the Retail Sales control group, which strips off autos, as well as energy and construction. This would be seen as the core rate of increase in retail sales, and typically isn’t given as much attention by the market as by analysts looking at longer trends.

Because there are a lot of numbers released all at once, you can sometimes see some volatility in the market if they don’t all come in line with expectations, as the market processes the discrepancy.

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