Will a Strong Retail Sales Report Help the Dollar?

The recent string of data shows the US economy is recovering from what will likely be revised into a small quarterly contraction.  We know that slack in the labor market continues to be absorbed.  Evidence from the average hourly earnings, Employment Cost index, and the Employer Costs for Employee Compensation that was reported yesterday, that upward pressure on labor costs is being experienced.  From a competitive point of view, unit labor costs are rising.  

The third piece of the macroeconomic puzzle is consumption.  Americans went on a shopping spree last October and November,, but went stayed home from December through February, when retail sales actually fell by 0.7% a month (though the decline was partly a function of prices).  

Retail sales in March rose by 1.1%, the most in a year, however, in April, sales were flat.  Retail sales are expected to have risen by 1.2% in May, aided by the strong auto sales figures that have already been reported.  The component that is used for GDP calculations excludes autos, gasoline and building materials (among some other minor categories).  It is expected to rise 0.5%.  That would put April-May average at 0.25% compared with 0.02% in Q1. 

If US retail sales are as expected, or even stronger, it may not be enough for the dollar to recover much against the European currencies, where a more powerful dynamic is at work.  German bunds continue to trade heavy.  The risk is that this position adjustment has not run its course.  And far from trying to calm the market down, ECB President Draghi told investors to get used to it (last week) and today Bundesbank President Weidmann seemed to embrace the backing up yields as a health development after the market "indulged in enthusiasm".   He says reversal will foster greater risk awareness. 

The euro and sterling have both moved lower today ahead of the US retail sales data.  The euro failed to push through $1.1400 yesterday, and some momentum players took profits.  Initial support now is seen near $1.1220.  A break of $1.1180 is probably needed to signal anything important from a technical perspective.   For sterling, initial support is seen in the $1.5380-$1.5415 band. 

The dollar recovered smartly from the Kuroda-induced sell-off yesterday.  The dollar bottomed near JPY122.50 yesterday, and Asia took it up nearly a big figure.  Europe extended the dollar's recovery a little  The next retracement objective is seen near JPY124.15 and then JPY124.55.  The government appears to be making a more sustained effort to distance itself from the BOJ Governor's assessment. 

Separately, but also consistent with the dollar's recovery, the Nikkei rallied almost 1.7%, to nearly offset the losses seen in recent days.  The rally was also sufficient to close the gap created earlier in the week on a sharply lower opening. 

The dollar-bloc currencies are lower.  The New Zealand dollar has been crushed.  It is off 2.7%, which is one of its biggest single-day declines in history.  The spur was the central bank's 25 bp rate cut and clear signal that through its bill yield forecasts that it anticipates another cut.  The central bank cited low inflation pressures and anticipation of weaker demand (via terms of trade erosion).   The Kiwi briefly dipped below $0.7000, setting new multi-year lows. 

These sharp losses weighed on the Australian dollar, despite a considerably stronger than expected employment report.  Australia created 42k jobs in May, nearly three times more than the Bloomberg consensus expected.  Of these 14.7k were full-time positions.  The unemployment rate slipped to 6.0% form a revised 6.1% (from 6.2% initially).  There were three mitigating factors.  First, the monthly jobs report has become more volatile, and, therefore, less helpful in anticipating the central bank's reaction function.  Second, consumer inflation expectations, also reported today, slipped to 3.0% from 3.6%.  This matches the lowest since September 2013, which itself was the lowest since 1997. 

Thirdly, although China's reported data that was largely in line with expectations (retail sales 10.1% in May and  industrial output 6.1%), it does not alter the perception that the easing of policy has still not been sufficient.  Fixed asset investment slow to 11.4% from 12% (year-to-date annualized) from 12.0% in April.   New yuan loans (CNY900.8 bln) and aggregate financing (CNY1220 bln from CNY1050.4 bln in April) does not appear to be generating the same unit of national output.   It is in this context, we note that the dollar-bloc currencies are being tarred with the same brush that is weighing on many of the commodity producers in the emerging markets today.  

The Swedish krona has rocked.  A combination of yesterday's strong industrial output report  (2.0% month-over-month in April vs 0.2% guesstimate from Bloomberg consensus) and today's firm inflation report has sent the krona up by more than 1% against the euro, which is its biggest move here in Q2. 

Headline CPI popped back into positive ground (0.06%) from deflationary -0.23% year-over-year pace seen in April.  Using fixed mortgage interest rates, the underlying rate rose to 1.0%, which is the highest since August 2013.    The Riksbank meets next on July 2.  The risk of a rate cut has diminished while it continues to buy government bonds.  

Although there seems to be little concrete, the noises coming from Europe about Greece seems more promising.  Greek bonds have rallied, and the local stock market is up 7%, lead by a 13% rally of the financial sector.  This is despite S&P's decision to cut its sovereign rating to CCC from CCC+ ostensibly in response to the decision to bundle its payments to the IMF this month.   The ECB's increase in the ELA yesterday was the largest in several months.  As the ECB only give what it assesses Greek banks need, this must be understood as a sign of greater stress on Greek banks.  While many observers are looking at the large ECB repayments due next month (and August) and suggest July is the "real|" deadline, Greek banks appear to be running out of collateral quicker.  That potentially is the "real deadline". 

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