As another snowstorm hammers the Northeast, today’s retail sales report reminds us how much damage inclement weather can have on consumer demand and the economy. Everyone is blaming the weakness in retail sales on the weather but there’s no question that the slowdown in job growth in December and January also contributed to the contraction in demand. If economists are blaming the pullback in spending on inclement weather, then we can also attribute the market’s disappointment and the sell-off in the dollar to Mother Nature. USD/JPY dropped to its lowest level this week and GBP/USD climbed to multiyear highs on the back of the retail sales report but for the most part FX traders have taken the news in stride because weather has only a temporary impact on the economy.
Nonetheless, if you ask any small business in the Northeast particularly restaurants and retailers, weather can have a very real impact on their bottom lines especially in a year like this one when the snow just keeps on falling. If there is another major snowstorm in the month of February we could be looking at less than 3% GDP growth in the first quarter. Retail sales fell 0.4% in the month January which was not only much weaker than anticipated but made worse by the sharp downward revision in December. Aside from falling for 2 months in a row, consumer spending contracted by the largest amount since June 2012. Excluding auto and gas purchases which can be volatile, core retail sales also fell 0.2%, the largest decline in 11 months. So as much as the Federal Reserve may be optimistic about the outlook for the U.S. economy and committed to continued tapering, they may have to slow the pace of reduction if retail sales and non-farm payrolls do not pick up soon. Jobless claims were also released this morning and they rose slightly from 331k to 339k.
Based on the modest sell-off in the greenback, forex traders are looking forward to the end of winter. With only 5 more weeks to go, the general sense in the market is that the central bank will not be changing its strategy based on the recent economic reports. However, the sell-off in stock futures and Treasury yields shows that other investors are disappointed by today’s release and if stocks do not recover intraday, the dollar could trickle lower throughout the North American trading session.