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S&P500 Drops Ahead of Retail Sales

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📆 Key report on condition of US consumer to be released at 1:30 pm BST

Previous week saw release of solid data from the US jobs market while earlier this week investors were offered softer-than-expected data on US CPI and PPI inflation gauges. Now the time has come for the release of the US retail sales report for March that will show the condition of the US consumer. However, expectations do not suggest it is holding firm. Headline sales are seen dropping 0.4% MoM, following a similar drop in February, while sales excluding autos are seen dropping 0.3% MoM, following a 0.1% MoM drop in previous month. On one hand, jobs market data is solid and shows wages rising but at the same time US consumers are reluctant to boost spending. Moreover, things look much worse in real terms.

Bank of America expects data to show an even bigger drop – of around 1% MoM – based on its proprietary data on credit card transactions. The last time we saw such a steep drop was in December reading.

How may markets react?

  • It should be noted that market consensus is relatively low, especially when we consider the base effect from February. This creates a scope for a better-than-expected reading (smaller drop in sales). In such a scenario, both USD and equity market indices may see gains
  • Should data show a bigger-than-expected drop, USD may experience a deeper pullback while indices may see mixed reaction. Indices would most likely drop in a knee-jerk move before recovering on the back of dwindling rate hike odds
  • However, should sales show positive growth, USD may regain some ground, especially as it is quite oversold.

Retail sales struggle but the situation in real terms is even worse. Source: Bloomberg, XTB

Retail sales data will not be key for next FOMC decision

Fed is focusing especially on inflation and jobs data. Of course, a plunge in retail sales could be another hint for US central bankers that it may be wise to pause the rate hike cycle. On the other hand, recent comments from Fed Bostic suggest that the May meeting should result in one more rate hike but it will likely be the last one in the current cycle.

US500

US500 trades slightly lower ahead of US retail sales print but remains close to recent local highs. Meanwhile, TNOTE averts drop (inverted axis), which hints that a potential negative reaction on US500 is looming. Of course, should retail sales data surprise to the upside, index futures should see positive reaction as it would hint that the US economy is not in recession, at least not yet.

Source: xStation5

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