Wherefore Art Thou, US Retail Sales Rally?

Looks like Uncle Sam started the week on a strong note!

The market players got a boost from the U.S. retail sales report, which showed a 1.1% growth in September when analysts were only expecting a 0.8% increase. In addition, August’s numbers were also revised higher from 0.9% to a 1.2% uptick. The last time the data showed back-to-back gains of more than 1% was back in late 2010 when the movie Inception was blowing our minds out!

Traders were happy to know that the gains in retail sales were broad-based, as 12 out of 13 categories showed improvement. Apparently, higher stock prices and home values encouraged consumers to shop last month.

The upside surprise in retail sales supported the bright picture that the other U.S. economic reports have been painting lately.

If you recall, the NFP report blew investor expectations out of the water when it showed the unemployment rate dropping below 8% for the first time since January 2009.

Even consumers have been feeling giddy lately as the CB consumer confidence index rose to its highest level since February at the same time when the University of Michigan consumer sentiment rocketed to its five-year high.

Interestingly, the Greenback climbed and the higher-yielding currencies took a beating minutes after the report is released. This is in contrast to investors’ expectations of an improvement risk appetite and a rally in high-yielding currencies.

USDX Reaction to U.S. Retail Sales

Investors, it seemed, didn’t trust the sudden improvement. And who could blame them? A closer look at the report will reveal that the huge jump in retail sales is partly due to the release of the iPhone 5. This could reverse in the coming months once the buying frenzy dies down.

There’s also the whole labor market issue. Even though the unemployment rate was reported to have fallen to 7.8% from 8.1%, the U-6 unemployment rate, a broader measure of U.S. employment, remained steady at 14.7% in September.

Of course, we can’t discount that the Greenback’s rally was the result of traders returning to fundamentals. The unexpected rise in consumer demand could trigger the Fed to end their QE program sooner than expected. This isn’t something you should count on though, as Bernanke recently gave a speech in Tokyo about how inflation is still weak and how growth is frustratingly slow.

Overall, it seems that the dollar’s gains are temporary. The U.S. economic environment is still generally bleak, and if we continue to see positive reports from China and the euro zone, we could see traders shift back to higher-yielding currencies.