3 Numbers: US retail sales expected to bounce higher
- US retail sales expected to bounce higher after two weak monthly reports
- The past two months have been poor and a turnaround is expected for September
- US retail sales growth rate is lower now than in the 1990s or the 2000s
- Janet Yellen's speech will attract scrutiny for clues on the Fed's rate hike plans
By Juhani Huopainen
It feels like today will be an interesting day in the markets – yesterday EURUSD continued to a new low during European hours, but then turned higher and eventually almost reached Wednesday’s highs. GBPUSD has stabilized and rose on Wednesday and Thursday. USDJPY is almost unchanged now, from levels from where it was six days ago, despite making marginally higher lows and higher highs on an almost daily basis.
Meanwhile, stock indices from Europe to US have fallen for couple of days. And after Thursday’s more dramatic price decline during the early part of the day, the S&P 500 index managed to close yesterday near Wednesday’s closing levels.
Is the dollar's recent strength about to end, and the stock markets finding a bottom? What fundamental explanation could fit this technical view?
I would bet that the obvious answer is that the expectations of a Federal Reserve rate hike in December are about as high as they could plausibly be at this point, given worse-than-expected economic data (including for US retail sales, depending on the impending release for September) and dovish central bank talk (depending on what the Fed’s Janet Yellen says later today).
Turnaround signals? Many markets are essentially range-trading
At most we could get some hints on how the ECB will ease the bond purchase programme's restrictions in December. I'll write a separate preview of the meeting.
US September Retail Sales (1230 GMT). Headline retail sales are expected to have increased by 0.6% in September and sales excluding autos by 0.4%. The large expected increase would be more than welcome as headline sales fell in August – for the first time in five months.
The recent boom in auto sales has helped to mask the underlying weakness in retail sales. Respected people in the field prefer to look at “control” retail sales data, which excludes autos, auto parts, gasoline, building materials, food services and drinking place spending.
Whatever data one chooses to consider, it is clear that retail sales growth rate has on average been lower during the current post-crisis growth period than it was in the nineties or the 2000s, before the financial crisis begun.
I prefer the simple “excluding autos” data, because autos are practically durable goods. Many of the other items excluded from the control group are almost instantly consumed and largely discretionary, and are representative of the economy. There comes a point where removing an item does not bring you a “core number” with improved signal-to-noise-ratio.
The yearly change has crept lower over the past five years despite a move higher beginning in late 2015. Retail sales for the past two months have been bad and a turnaround is expected now.
Long-term US retail sales trend
Zooming in on the recent US retail trend
Chart source: Saxo Bank
US October Flash U.Michigan Consumer Survey (1400 GMT). Consumer sentiment is expected to climb to 91.8 from September's 91.2. The increase would still leave the index trapped in the range since 2015, and far below 2016-high of 94.7 in May.
The longer sentiment chart with oil added shows some weak and erratic negative correlation between the two. Probably rising oil prices haven't hurt the sentiment yet because the oil price level is still relatively low.
More importantly, the chart shows how the sentiment's increase in late 2014 was overblown, and the recent range-trading could easily be interpreted as normal consolidation after an extreme move.
US consumers might have a moment similar to the UK's Brexit refererendum with their presidential elections. People who believe Hillary Clinton (or Donald Trump) would be a disaster might be delaying their spending decisions, and might even continue doing so for a while after their object of disdain is elected.
Federal Reserve chairwoman Janet Yellen speaks (1730 GMT). The Fed’s Janet Yellen is the keynote speaker at an economics conference today. Fed president Eric Rosengren will speak at 1230 GMT, but Yellen’s possible message will be much more important.
The title of the conference is “The Elusive 'Great' Recovery: Causes and Implications for Future Business Cycle Dynamics”. Interestingly, given what I wrote on retail sales above, one of the papers to be presented discusses why consumer spending growth has remained subdued during the current recovery.
The overall theme and the seminar paper topics suggest Yellen might in address how recovering from a financial crisis is hard and slow work. It would not take much to interpret such comments as meaning that the Fed might not necessarily hike rates in December.
The current futures-implied expectations suggest close to 70% probability of a rate hike before the year is over. The probability has not popped above 80% after January, so there is not much more room for rate hike expectations to increase further. To me that always sounds like the risk of a surprise to the other direction has increased.
I expect worse-than-expected economic data and dovish talk to cap the rate hike expectations in the coming months, which could hurt the US dollar and help the stock markets. Next week’s flow of data and news will be slow. It is plausible that Yellen’s “dovish comments” will be featured heavily in market commentaries and the financial press.
– Edited by Robert Ryan
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Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.