U.S. Retail Sales: Game Changer for the Fed?

And just like that, we’re starting to see green shoots in the U.S. economy! A couple weeks back, it was the U.S. NFP report. This time around, it’s retail sales!

According to the Commerce Department, retail sales came in much better than the expected 0.3% growth, printing a 0.8% increase last July. That’s a solid turnaround from the 0.7% drop we saw in June!

This marked the first month-on-month increase in four months. In addition to that, we also saw purchasing pick up in all thirteen categories! The last time this happened was in 2005, back when Huck was still a teeny weeny barista wannabe!

Why are investors so giddy about this? Take note that consumer spending accounts for nearly 75% of the U.S. GDP. If this turns out to be the beginning of a sustained spending spree, it could do wonders to fuel growth in the U.S. economy.

Interestingly, the better-than-expected data helped the dollar rally, as it soared against its major counterparts during the New York session.

Normally, good data would help bolster risk appetite, allowing higher-yielding currencies to romp all over the dollar. This time however, the dollar rallied.

EUR/USD Retail Sales

As we can see on the chart above, the euro had been rallying a couple of hours before the release in anticipation of a stronger reading. But lo and behold! EUR/USD actually FELL when the report came in much higher than projected. What gives?

With all the poor data the U.S. was posting earlier this year, some believed that QE3 was inevitable. Traders began positioning themselves for the bullish move that would theoretically be sparked by additional liquidity measures.

However, with the recent results of the labor and retail markets, some investors are now thinking that the Fed will continue to sit on its hands and go with a wait-and-see approach. As a result, investors have begun to reduce their positions in riskier assets.

Before you totally forget about QE3 though, you must remember that a month’s worth of data doesn’t make a trend. In fact, some analysts barely changed their growth forecasts, saying that extreme weather conditions most likely prompted additional spending on big ticket items such as air conditioners.

Also, let’s not forget about the early back-to-school shopping. Apparently, many parents put off discretionary spending around this time of the year in order to buy pens, bags and iPads for their kids. If you ask me, the School of Pipsology is all they need. But that’s just me.

Another reason why some analysts are shrugging off the strong figures is that the Fed isn’t really looking at consumer spending. In fact, if we take a look at the last meeting minutes, we’ll see that it’s more worried about the employment conditions in the U.S. and the debt crisis in the euro zone. But with the U.S. printing stronger-than-expected NFP data earlier this month and with no bad news from the euro zone lately, it’s easy to see why the QE3 junkies are taking a break.

While the recent retail sales figure isn’t a game changer for the Fed, other investors might take this as an opportunity to pare back their QE3 bets so you should tread carefully before you decide to buy on retracements. At the very least, we’ll probably get more clues from the Fed in its FOMC statement or the Jackson Hole meeting coming up in a couple of weeks.

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