Risk aversion was in the air before the U.S. retail sales report and when the data was released, the U.S. dollar fell sharply against all of the major currencies. Economists were looking for retail sales to rebound in June but instead consumer spending declined for the third consecutive month. Despite the rebound in stocks last month, the uncertainty in the global economy and the high level of unemployment has kept consumers out of the stores. While non-store retailers saw a 0.5% increase in sales, spending in general dropped 0.5% and excluding autos and gas, retail sales declined 0.2%. In all, this was a very ugly retail sales report. There was broad based weakness in spending but the largest drop off was in demand for sporting goods, spending on building materials, gas stations and department stores.
With 3 back to back months of negative retail sales growth, we are looking at a very weak third quarter GDP that will show minimal improvement in growth. The Empire State Manufacturing index rose to 7.39 from 2.29 in July but this uptick in NY manufacturing conditions will be lost amongst the weak retail sales number.
While this morning’s U.S. consumer spending report hardens the case for QE3, it does not change our view that nothing new will come from Bernanke on Tuesday and Wednesday, when he delivers his semiannual testimony. We already know that the Fed Chairman is concerned about the outlook for the U.S. economy and given today’s report, he will definitely leave the door open to more stimulus. However he won’t provide any clear cut signals on the timing, which is what investors really want to hear. As we wrote in What is the Most Realistic Timing for QE3, the case for another round of asset purchases is not strong enough for August. The next Fed meeting is only 2.5 weeks away and while there is no argument that the labor market is weak, non-farm payrolls have not been bad enough to make QE3 a done deal.
September is a far more realistic timing for QE3 because by then 2 additional months of non-farm payroll reports will be released, central bank officials would have held their annual economic summit in Jackson Hole and the Fed would have prepared their latest economic projections. With 2 months to go before the September meeting, Bernanke is under no pressure to drop any new hints because he will have plenty of opportunities to do so the future. For more details, read our special report on in The Most Realistic Timing for QE3 and Its Impact on the U.S. Dollar.
Meanwhile earnings season is still underway which means we could see big moves in equities that can affect currencies.
