USD: How Retail Sales Impacts Odds for Dec Taper

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The U.S. dollar’s reaction to the U.S. retail sales report was tempered by the sharp rise in jobless claims. Consumer spending rose at its fastest pace in 5 months but jobless claims hit its highest level since March. While the market may be worried about the implications of higher claims on December non-farm payrolls, the correlation between claims and payrolls have been very weak. Also, the surge is most likely a short-term distortion because of the seasonal volatility usually seen around the Thanksgiving and Christmas holidays. Between the 2 releases, the retail sales report is always more important. With spending rising by 0.7% in November from an upwardly revised 0.6% in October, the odds of tapering this month have increased and in response U.S. Treasury yields and the dollar edged higher. The dollar’s reaction would have been larger if spending rose 1.0% or more but with the offsetting impact of the jobless claims report, the move are muted. Also, we think of odds of December tapering have only increased slightly to 55-45 from 50-50.

Nonetheless the Federal Reserve should be please to see that spending has increased. Both the upward revision in the October figures and the improvement in November indicate that the economy is moving in the right direction. Consumer spending provides the backbone for growth and the sharp rise over the 2 past months means that retail sales will contribute positively to GDP growth in the fourth quarter. Advance retail sales rose 0.7% and excluding gas and autos, spending still increased 0.6%. Many Federal Reserve officials sounded open to the possibility of reducing bond purchases this month before they saw today’s report and their confidence will only be hardened by the stronger spending numbers. Some economists were worried about the decline in clothing sales but consumers spent more on pricier items such as furniture, building materials and motor vehicles. Online shopping also surged, leaving Americans with more time and money to dine out. As these are positive developments for the U.S. economy, they support a further rally in USD/JPY pre-FOMC. The rise in jobless claims shouldn’t be too much of a concern because the seasonal distortion should reverse in the coming weeks with jobless claims falling back from its current level of 368k to below 330k.

Despite better retail sales, the increased odds of December tapering have limited the positive reaction in equities. The holidays are always a sensitive time for the financial markets and if investors are given any reason to take profit, especially after this year’s spectacular rally in equities, they will. Yet over the past 30 years, the Federal Reserve only tightened monetary policy 4 times in the month of December. With the exception of 1986, the increase in interest rates was consistent with a long period of tightening that started well before the December meeting and continued into the next year. In 1986, the rate hike was the first of a series of moves. Of course, the current level of monetary stimulus is different from anything that we have seen in the past and even if the Fed chooses to reduce stimulus, it still leaves monetary policy extremely accommodative. So while history shows that December tightening is rare, the Fed is delaying the inevitable and with retail sales on the rise, December tapering is still on the table.

Kathy Lien
Managing Director

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