The U.S. Retail Sales: More Reason to Taper

Since the start of July, the dollar has been backpedaling. Just take a look at the U.S. Dollar Index and see for yourself – from trading above 85.00, the index is now in the area of 82.00.

You may be wondering what caused the dollar to tumble. It’s elementary, my dear Watson – diminishing expectations of a “Septaper,” or QE tapering in September.

After all, the job market, which is one of the key aspects that the Fed looks at when making its monetary policy decisions, hasn’t exactly been inspiring confidence in the economy. Just last month, we saw a poor showing from the non-farm payrolls report, which revealed a net gain of just 162,000 jobs versus the forecasted increase of 184,000.

However, with the release of last month’s retail sales numbers, it seems that the markets are once again starting to believe that Septaper is on!

Just yesterday, it was confirmed that retail sales climbed for the fourth straight month in July, suggesting that U.S. consumer spending is gaining momentum. Take note, consumer spending makes up about 70% of the U.S. economy, so this is a big deal. Strength in this sector would help offset the negative effects of the government’s spending cuts and would go a long way in helping the job market.

The headline figure reported a 0.2% increase following up the 0.6% surge in June. Meanwhile, core retail sales rose by 0.5%, which is a respectable upgrade from the 0.1% uptick the month prior.

Digging into the report, it appears as though clothing chains saw the most growth, as they reported a 0.9% increase. Likewise, business was good for general merchandise stores, which saw growth of 0.4%.

After these numbers were released, government debt yields shot up, signaling that investors believe that the chances of a Septaper had increased.

The excitement over Septaper is already beginning to manifest on the charts.

Daily Chart of the U.S. Dollar Index

On the daily timeframe, we see that the USDX has had three straight winning days. A three white soldiers candlestick pattern has even formed, right smack on the rising trend line! Graduates of the School of Pipsology know that this is widely considered as a bullish signal, hinting at a reversal following a strong downtrend.