The Week Ahead: Retail Sales Fails To Impress Forex Traders

Source: FOREX.com

There are no two ways about it: the past week was a slow week for foreign exchange traders (though equities and commodities have certainly been more volatile – see below for more). With no top-tier data releases from Europe or the US during the first four days of the week, the US dollar generally consolidated against most of its major rivals over the first 96 hours of the week’s trade.

On Friday, traders were saying TGIF (thank goodness it’s Friday) for at least two reasons: the traditional end of the workweek and the release of the October US retail sales report, which was billed as the marquee data release of the week. As it turns out, even that report was a bit of a dud both in terms of economic and market activity.

US retail sales rose by a subdued 0.1% m/m in October, well below the 0.3% reading anticipated by economists. The “core” retail sales measure, which filters out more volatile automobile purchases, rose 0.2% m/m, weaker than the 0.4% increase anticipated by economists. In terms of the details, sales declined at service stations and electronics stores, held steady at clothing stores, and rose at furniture stores, restaurants, and especially online stores.

Meanwhile, the concurrent producer price index (PPI) report also came in worse than expected, with producer prices actually declining -0.4% m/m against expectations of a 0.2% rise. The “core” PPI reading - which removes the impact of more volatile food and energy prices - also fell, coming in at -0.3% m/m vs. an anticipated gain of 0.1%.

Taken together, these economic reports present more ambiguity for the Federal Reserve heading into next month’s highly-anticipated monetary policy meeting. At this point, the central bank still looks likely to raise interest rates, but if Friday's releases were the start of a run of weak data over the next month, the Fed could still push back its long-awaited rate hike. After all, what’s another month or two after nearly 10 years of 0% interest rates.

Market Reaction

The markets took the data mostly in stride, with the US dollar actually strengthening by 10-20 pips across the board. Meanwhile, US equity futures held steady and continue to point to a slightly lower open. The yield on the benchmark 10-year US Treasury bond ticked down to 2.28% before bouncing back to essentially unchanged at 2.30%. Both gold and oil turned lower on the day, extending their recent bearish streaks.

Moving Forward…

On Friday afternoon, it felt as if traders were eager to put the week to bed and move on to potentially more volatile markets the following week. See our outlook on major markets and the key economic data to start planning your coming week of trade!

After a relatively quieter start on Friday morning, European stocks started to roll over again and were trading near their session lows when this report was written. It was an ugly week for global equities and an even a worse one for commodities. Concerns over a potential rate increase in December from the Federal Reserve is unnerving investors, while a continued soft patch in Chinese data suggests growth in the world’s second largest economy is slowing down more sharply than had been anticipated. In the US, the earnings season is drawing to a close and the results have not been great.

There is little further catalyst to support the markets except the ongoing expectations that the world’s major central banks will remain extremely accommodative for an extended period of time. In fact, the ECB is likely to expand its bond purchasing program and cut rates into the negative in December. And judging by the latest growth figures that were released on Friday, we would certainly not be surprised if it did. But this should ultimately be good news for stocks, although for now the market’s focus is elsewhere. The Eurozone Flash third-quarter GDP estimate came in at +0.3% versus +0.4% expected and down from +0.4% in Q2. On year-over-year terms, GDP was +1.6%, up from +1.5% previously but below +1.7% expected. The latest US macro numbers were likewise far from convicting as both headline and core retail sales rose less than expected while PPI unexpectedly fell. Consequently, traders were left confused as to what the Federal Reserve may do in next month’s highly-anticipated monetary policy meeting.

As things stand, the Fed still remains on course to raise rates but some traders are starting to wonder whether October’s stellar jobs report was a one-off and whether we will start to witness some weaker data next month. So the Fed may yet again delay raising rates and this could provide the market some support it badly needs right now. This week’s key data for stock market participants to keep an eye on will include Monday’s preliminary third-quarter GDP estimate from Japan; the latest German ZEW survey and US Consumer Price Index, both on Tuesday; minutes from the FOMC’s last meeting on Wednesday and then the Bank of Japan’s monetary policy statement on Thursday.

On the technical front, despite the sell-off the Euro Stoxx 50 index is technically still in consolidation as it remains within the converging trend lines, but the outlook is beginning to look bleak. After the last stock market rout at the end of August, the index managed to hold its own above the long-term bullish trend line and found strong support around the 3000 level. Long-term investors may look to again use this latest pullback as an opportunity to increase their holdings, so we need to be wary of becoming convinced that another sharp correction is underway. It may well be, but at this stage, the long-term support levels are still in place so one needs to proceed with a degree of caution. In the near-term, some of the key supports to watch include 3325 and 3285, levels that were formerly support and resistance. Below these levels, the 50-day SMA comes in around 3265/70, followed by the 61.8% Fibonacci retracement at 3155.

On the upside, the short-term resistance level to watch is at 3390, a level which was previously support. The 200-day average comes in around 3480/5, followed by additional resistance, a 61.8% Fibonacci level and a bearish trend line all around 3500.