Decline in US Retail Sales, PPI Sap Gains in FX

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After a week of focusing on Europe and Asia, we can finally turn our attention to the U.S. economy. Early gains in currencies are beginning to fade on the heels of weaker U.S. data. This morning’s economic reports paint of picture of a slow and struggling U.S. recovery that will require continued stimulus from the Federal Reserve. Retail sales turned negative for the first time in 4 months with consumer spending dropping 0.3% in October. While the bulk of the weakness was in motor vehicle demand, there was also a broad based decline that included lower spending on furniture, electronics, building materials, clothing and online purchases. This indicates that improvements in the U.S. labor market have not prevented American consumers from closing their wallets. Retail sales also fell 0.3% excluding purchases of autos and gas. According to the Commerce department, it is hard to say how much of the decline can be attributed to Hurricane Sandy because the data showed both positive and negative storm effects. When the Federal Reserve last met, they refused to be swayed by one month of improvements in U.S. data and based on today’s retail sales report, their instinct is right. The FOMC minutes are due for release later this morning and we expect the details of the last Fed meeting to reveal continued caution within the central bank. The decline in stocks this month should lead to a further pullback in economic activity. The 0.2% decline in producer prices was far less of a surprise considering that commodity prices decreased in the month of October. Oil prices dropped 6.75% last month and a consistent but not nearly as significant decline was also seen in the price of food. Inflation has not been a problem for the Federal Reserve for months now and with demand in the U.S. remaining weak and growth in Europe set to slow further, price pressures will not only be limited but won’t inhibit any of the Fed’s plans for monetary policy.

Meanwhile USD/JPY is on the move because of political developments in Japan. Our colleague Boris Schlossberg wrote a long and detailed piece on Prime Minister’s plans to dissolve the lower Parliament on November 16th and its implications for the currency.
Noda is playing a dangerous game because there is a very good chance that former PM and current LDP leader Shinzo Abe will regain power and he favors even easier monetary policy. Abe talked about changing BoJ law today to include a new inflation target and unlimited action towards achieving it. While dissolving the lower house proactively may help Noda avoid a no confidence vote on his unpopular Cabinet, the problem is that many members of his party fear that it may mean a complete defeat for the DPJ which could the pave the way for the LDP to regain power. However moving forward with elections may be one of the only ways Noda can get the opposition party to authorize Japan to sell more bonds to finance their growing deficit and prevent the country from emptying its coffers by the end of November. The political uncertainty comes at a terrible time for Japan’s economy. According to a report from the Cabinet Office, consumers are saving and not spending as the cash balance of households rise to its highest level since 2005. Rating agency Fitch warned that there is little scope for near term optimism on the Japanese economy and Kyodo news reports that the government could downgrade its economic assessment next week.

Kathy Lien
Managing Director

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