Monday’s release of United States Retail Sales data will be closely scrutinized by traders, and could be a turning point for markets. Investors are on the lookout for signs of a potential recession, or evidence that one can be escaped. Typically, retail sales is a leading indicator for the economy, unlike other data that has been coming out recently, such as jobs numbers.
February’s reading will be particularly in focus after what happened around a month ago. January’s reading saw a crash to -0.9% compared to the -0.1% expected. It was further compounded by a sudden shift to negative in the Fed’s GDPNow tracker. The sudden apparent loss of confidence among consumers and widening of the trade deficit just as President Trump was pushing forward with his tariff agenda was the main catalyst to spook markets last month.
What’s Under the Hood
The thing is, a closer examination of the retail sales data showed a more mixed perspective. Part of the drop (which was factored into the expectations) was due to harsh weather and the LA fires. That will not be the case this time around.
But, on top of that, and the factor that was a surprise for the markets, was the drop in automotive sales. Cars are a big ticket item, and are often the first to see a shift if consumers are worried about the financial outlook. But the reason for the drop in automotive sales in January was attributed to a lack of stock. So, it wasn’t that there was a drop in consumer demand, but simply not enough supply. That was after particularly strong automotive sales in December that had simply depleted showrooms. Presumably, dealers have restocked in the meantime, and this probably won’t be a factor in February.
Time to Hit Bottom?
The consensus among expectations is that United States February Retail Sales will rebound at 0.5% growth instead of the -0.9% seen last month. That wouldn’t be enough to recover from January’s losses, but definitely a resumption of the right direction. However, just meeting expectations might not be enough to reassure the markets.
The concern is that higher prices from tariffs and the uncertainty around policy that is keeping businesses from investing will weigh on the economy. A better than expected result in retail sales (and better yet, a revision to the upside to the prior month’s figures) would show that the largest driver of the US economy remains resilient. Coupled with the recent steady decline in inflation, that could suggest that fears around the US economy have been exaggerated, and cause a release of the safe haven flows.
Will the Dollar Get Its Mojo Back?
The thing is, at the start of the year, there was this idea of “American exceptionalism” in the economy. Other major economies were facing challenges, while it was expected the US economy would outperform. This led to foreign investors buying into American markets as well as keeping yields up, both of which kept the greenback strong.
But if the US economy isn’t going to outperform, and other major economies will do better than expected, then those flows reverse, weakening the dollar. In order to put a floor under the greenback, there would have to be indications that the US economy will outperform. A strong retail sales number might help set the stage for that, but further data will likely be necessary to fully convince the markets.
