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Greetings, forex buddies!

The Greenback has been taking a beating this week, thanks mainly to the hard slump in U.S. bond yields on Monday and disappointment over Trump’s press conference yesterday, given that expectations were high that the Donald would lay out the details of his economic policy.

Instead, we got entertained with some “fake news” media-bashing (*cough* CNN and BuzzFeed *cough*) and other fun stuff, including Trump’s very own sting operation on top U.S. intelligence officials.

Anyhow, the U.S. retail sales report is scheduled for release this Friday (January 13, 1:30 pm GMT), so if you’re looking for a post-NFP and post-Trump catalyst that will likely allow the Greenback to recover (or drive it even lower), then you better gear up by reading up on today’s Forex Trading Guide.

What is this report all about?

The retail sales report shows the total estimated value of sales at the retail level. As such, it gives forex traders and decision-makers alike a snapshot of the level of consumer spending or “personal consumption expenditure” in the U.S. economy.

And consumer spending, in turn, is very important because it is the backbone of the U.S. economy. Q3 U.S. GDP, for example, expanded by 3.5% quarter-on-quarter annualized. And the 3.0% growth in consumer spending accounted for 58% of total GDP growth, thanks to its positive contribution of 2.03%.

Also, healthy levels of consumer spending mean that domestic demand is high. And high domestic demand usually means higher inflationary pressure. And higher inflation and faster GDP growth, while being inherently positive by themselves, also mean higher odds of a rate hike.

And as we now know from the December FOMC statement, the Fed projects 2-3 rate hikes this year. And rate hike expectations will likely remain alive, so long as the stream of economic reports remains positive.

Oh, also note that there are two readings: (1) the headline reading and (2) the core reading. The headline reading includes all retail store types while the core reading excludes sales from motor vehicles and parts dealers since sales from such stores tend to be very volatile.

Some forex traders tend to focus more on the core reading since it is believed to be a better gauge for the underlying trend in consumer spending. However, it is the headline reading that goes into the GDP report.

What happened last time?

  • Headline reading m/m: 0.1% vs. 0.3% expected, 0.6% previous
  • Core reading m/m: 0.2% vs. 0.4% expected, 0.6% previous

The headline reading for the total value of retail sales in November printed a measly 0.1% month-on-month increase, which is a way off the expected 0.3% increase.

In addition, October’s reading was downgraded from a lofty +0.8% to +0.6%. Trend-wise, retail sales grew at a slower pace for the second consecutive month after peaking at +1.0% back in September.

Moving on, the core reading slowed from +0.6% to +0.2%. This also marks the second consecutive month of slowing growth after peaking at 0.7% back in September.

Looking at the details of the retail sales report, 10 of the 13 major retail store types reported growth. However, the fall in retail sales from the motor and vehicle parts dealers (-0.5% vs. +0.5% previous), sporting goods, hobby, books, and music stores (-1.0% vs. +0.7% previous), and miscellaneous stores (-0.8% vs. +0.6% previous) took their toll on overall retail sales.

Overall, the November retail sales report was a disappointment. However, the retail sales report barely caused the Greenback to budge and was ultimately a dud.

And that was very likely because forex traders were hunkering down for the December FOMC statement, which just a few short hours away.

USD Index: 15-Minute Forex Chart
USD Index: 15-Minute Forex Chart

What is expected this time?

  • Headline reading m/m: 0.7% expected vs. 0.1% previous
  • Core reading m/m: 0.5% expected vs. 0.2% previous

For the month of December, the general consensus among economists is that the headline value of retail sales will increase by 0.7% month-on-month. If vehicle sales are stripped to get at the core reading, then the consensus is for a 0.5% increase.

Economists are therefore expecting both the headline and the core readings to show an acceleration in retail sales, breaking the current downtrend on the two readings.

Looking at some of the available leading indicators, total vehicle sales in December climbed by an annualized rate of 18.4 million, more than the 17.9 million printed in November. This means that the headline retail sales reading will likely get a nice, solid boost.

Next, ISM’s non-manufacturing PMI for December held steady at 57.2, which is the best reading since October 2015. And according to the details of the PMI report, the retail trade industry is one of the industries that reported an increase in growth, higher business activity, employment, and new orders in December, thanks to the Christmas holiday.

Moving on, the December NFP reading was a miss, but the 156K non-farm jobs generated in December are still above the 100K needed to keep up with working-age population growth.

Furthermore, the labor force participation rate ticked higher from 62.6% to 62.7% while wage growth accelerated by 0.4%, beating expectations of a 0.3% rate of increase. Hopefully, these translate to higher levels of consumer spending.

Finally, the University of Michigan’s Index of Consumer Sentiment climbed from 93.8 to 98.2 in December, the highest reading since January 2016. Hopefully, this also translates to higher levels of consumer spending.

Overall, the available leading indicators appear to be pointing to stronger retail sales reading in December. The consensus readings, therefore, look about right.

As for historical tendencies, the unadjusted headline reading always gets double-digit growth in December, obviously because of the Christmas season.

However, the smoothing effect of seasonal adjustments means that the seasonally-adjusted reading is always much lower, and negative readings are not uncommon.

December U.S. Retail Sales: Seasonal Adjustments

And it’s actually pretty hard to gauge if the seasonally adjusted reading will meet, beat, or miss expectations, given that we’re looking at the percentage changes and not the actual numbers.

And revisions to the previous numbers do happen, which messes up the percentage change. However, economists do seem to have a tendency of overshooting their estimates, resulting in more downside surprises.

December U.S. Retail Sales: Expected vs. Actual

Anyhow, just keep in mind that stronger-than-expected readings tend to trigger a quick Greenback rally while a miss usually triggers a quick selloff. Last month was obviously an exception, though, given the proximity of the retail sales report release to the December FOMC statement.