Will Thursday's Retail Sales Report Be Strong or Weak?

US retail sales are due for release on Thursday and the degree of consumer spending could play a big role in determining where the US dollar may head next. Despite continued deterioration in the labor market, economists expect retail sales to have rebounded by 0.5 percent last month after having fallen 0.2 percent the prior month. Excluding autos, sales are expected to rise 0.7 percent compared to a 0.5 percent rise in April. If retail sales are as strong as the market expects, the dollar could hit a 4 month high against the Japanese Yen and extend its gains against the Euro. However, traders have to be careful because even if there is a pickup in consumer spending, Americans are probably only buying what they need and not spending money on any other discretionary items.

Food and Energy: The Biggest Contributor

Unsurprisingly, the surge in food and oil prices are expected to be the primary contributor to higher spending as higher prices have increased the checkout bills for all Americans. Since the beginning of March, the average price of a gallon of gasoline has increased from $3.20 to more than $4 a gallon, due to the $30 surge in crude oil prices. In a private survey, SpendingPulse, which is the retail data service for MasterCard Advisors reported that retail sales excluding autos improved in May as the rise in gasoline spending offset the drop in purchases of other discretionary items.

Retailers: Mixed Bag

Interestingly enough, not all retailers have been suffering. The following data is extracted from Business Wire’s Monthly Retail Report. Food and general merchandise discounters are faring the best with Costco (COST) and BJ (BJ) both reporting a double digit increase in spending. Clothing retailers like Chico’s (CHS) and The GAP (GPS) on the other hand have suffered the most. This clearly indicates a shift in spending behavior, where money is spent more on consumer staples than clothing or other luxury items. In times such as these where prices are increasing everywhere and layoffs are rising, it has become crucial for consumers to get the most out of each buck. If such conditions continue to persist, then it is safe to assume that discount stores will continue to be the biggest beneficiaries.

Don’t Rule Out a Disappointment

Despite the market’s rosy forecast for consumer spending, don’t rule out a disappointment. The International Council of Shopping Centers Chain Store Sales index reported a softer increase in consumer spending. Like the Business Wire Data, the biggest drop was in apparel, furniture and department stores. Discounters, drugs and wholesale clubs on the other hand were the largest gainers. Furthermore, according to the Beige Book report released on Wednesday 10 out of the 12 districts reported slower consumer spending while the remaining 2 (Boston and NY) reported mixed results.

Labor Market Should Remain Weak

However even if retail sales were strong in May, there is an underlying fear that future releases could weaken. Recent Non Farm Payrolls and ISM employment figures had profound impact on the markets, as the rise in unemployment sent out negative signals to investors. If this trend persists, coupled with tighter lending practices, the retail sector will be facing tough times ahead, as cash strapped consumers cut back further on their discretionary spending. In addition, the recently distributed government stimulus checks have been a big help for consumers, however the same cannot be said for retailers. Numerous sources indicate that consumers have been using the extra money to pay existing debt or putting it into their saving account for a rainy day. Consumers are becoming more conservative with their spending habits, which could potentially hurt retailers. It remains to be seen if the markets would continue to remain so upbeat about future releases.

Implications for the US Dollar

Since the market has turned very bullish dollars after Fed Chairman Ben Bernanke confirmed that interest rates will be left unchanged at their next monetary policy meeting, traders may shrug off any underlying weakness in the retail sales report. Unfortunately they understand that with inflationary pressures rampant and interest rates already at 2.00 percent, the Federal Reserve does not have much room to respond to weaker growth by cutting interest rates. Therefore as long as retail sales do not drop by more than 0.5 percent, at worst we should see mild dollar weakness and at best, a further rally in the US dollar in response to Thursday data.

Comments

[SWRichmond]

"Will Thursday's Retail Sales Report Be Strong or Weak?"

More important question, perhaps: Will anyone believe any more government economic reports?

[Xyrus]

If it's strong, it will have no impact. Why? Because everyone expects it to be stronger than normal because of those ridiculous fed rebate checks.

If it's weaker, that's when we'll see some interesting action. Mostly down.

~X~

[JimHawthorne]

Quick question, Kathy?
While the US$ can be described as "bullish" after say, Apr 23 or so, it also appears that the index is range-bound between 71.30-73.60.... (although if I really squint, we can see some higher lows and higher highs in there!)

Given the steady stream of suggestions that rate cuts are over and that hikes might even be in the horizon, how do you explain this??

[jackh]

It may tick a bit higher because of energy. Strip out the cost of fuel and it will fall.

Underwater on the mortgage, maybe even the car loan as the gas guzzlers have lost value, using credit cards to buy gas and food..... the American consumer has his back to the wall.

Once there is some consumer relief, then we will see some meaningful gains.

[Coelacanth]

I read today's Beige Book (data through June 2nd) and the segment on consumer spending said spending was "generally lackluster".

Most sales remained below year ago figures. Interestingly though most districts said that inventories were in line with expectations which probably means they're ordering less.

6 out of the 12 districts reported "lower selling prices and widespread promotional/discount activity....". The same districts also said they "continue to focus on ways to reduce costs and become more efficient...."

Auto dealers, almost across the board, reported inventories were higher than they wanted and sales were mixed.

Pretty much what we've seen so far.....when you strip out auto sales, retail results are middling and also skewed towards necessities, food and energy.

With all the dollar jaw boning Bernanke & Paulson (looks like Abercrombie & Fitch. LOL) have been doing lately I think retail is going to have to really disappoint tomorrow to see real dollar weakness.

I'm not getting in front of the number. If the number comes in only slightly worse than expectations (which seems likely) then I'm going to get long USD after the initial weakness.

Neo needs to consult the Architect now.