Forex Trading Guide: U.S. Retail Sales (Apr)

Hello, forex friends! If you’re lookin’ to grab some quick pips from the Greenback on Friday, then just know that the U.S. will be releasing its April retail sales report (May 13, 12:30 pm GMT), and I just happen to have a Forex Trading Guide for that top-tier event.

Why is this report important?

The United States Census Bureau releases a monthly report which presents the estimates for the total sales value at the retail level. This report is important to forex traders because it allows us to gauge the overall strength of consumer spending or “personal consumption expenditure” in the U.S. economy. And consumer spending, in turn, is important because it is the main driver of U.S. GDP growth.

In addition, the upcoming retail sales report is for the April period, which is the first Q2 month. If this retail sales report disappoints, then that would mean that Q2 is starting off on a weak footing. And that may convince the Fed to further delay their planned rate hikes, given that the advanced Q1 2016 GDP growth estimate of 0.5% quarter-on-quarter (0.7% expected, 1.4% previous) was already a disappointment.

Also, note that there are two readings: (1) the headline reading and (2) the core reading. The main difference between the two is that the headline reading encompasses all of the retail trade components while the core reading strips away sales from motor vehicles and parts dealers since sales from such stores tend to be very volatile. As such, some forex traders tend to give more emphasis on the core reading since it is better for gauging the underlying trend.

What happened last time?

  • Headline reading m/m: -0.3% vs. 0.1% expected, 0.0% previous
  • Core reading m/m: 0.2% vs. 0.4% expected, 0.0% previous

The headline retail sales reading for the March period printed a 0.3% month-on-month contraction, which is a disappointment because it was expected to advance by 0.1%. On a somewhat slightly more upbeat note, the previous headline reading was upgraded from -0.1% to 0.0%. Meanwhile, the core reading posted a 0.2% increase, which is also a disappointment because it was expected to increase by 0.4%. But it still printed an increase at least and the previous reading was upgraded from -0.1% to 0.0% to boot.

Looking at the details of the report, 9 out of 13 retail store types actually reported increases in sales, with the 2.1% decline in the sales of motor vehicles and parts dealers being the main drag. The decline in vehicle sales was the biggest in a year, but it’s not included in the core reading, which is why the headline reading was pushed into negative territory while the core reading managed to advance, albeit at a weaker pace than was expected.

Overall, the report was mixed, but the headline reading signaled a likely slowdown for Q1 GDP, so the Greenback was sent lower when the report was released. However, it seems that forex traders were more focused on the core reading since dollar bears had difficulty pushing the Greenback lower and there was even some follow-through buying after that, although the Greenback probably also benefited from safe-haven flows due to the risk aversion at the time.

USD Index: 15-minute Forex Chart

USD Index: 15-minute Forex Chart

What is expected this time?

  • Headline reading m/m: 0.8% expected vs. -0.3% previous
  • Core reading m/m: 0.5% expected vs. 0.2% previous

For the April retail sales report, the general consensus is that the headline reading will rebound with a 0.8% increase while the core reading is expected to increase further by 0.5%.

Browsing through some of the available leading indicators, total vehicle sales in April was significantly higher at 17.42 million when compared with March’s 16.57 million, which improves the probability that we’ll be seeing an upside surprise for the headline reading.

Moving on, ISM’s non-manufacturing PMI reading for April jumped from 54.5 to 55.7. And it just so happens that the retail trade industry was one of the 13 non-manufacturing industries that reported growth in April. The retail sales industry was also one of 15 non-manufacturing industries that reported higher levels of business activity and growth in new orders.

However, the retail trade industry was also one of five industries that reported a reduction in employment levels, which is confirmed by the most recent NFP report. Hopefully this won’t negatively affect the retail sales reading. Speaking of the NFP report, we also saw another round of increase in wages, so perhaps that will translate to higher spending.

Overall, the leading indicators are pointing to stronger headline and core retail sales reading for the April period, with odds being skewed slightly towards an upside surprise.