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Greetings, forex friends! The U.S. will be releasing its retail sales report this Friday at 12:30 pm GMT. And if you’re planning to trade that top-tier report and you need a quick recap, as well as a preview on what’s expected, then you better gear up by reading up on today’s Event Preview.

What happened last time?

  • July headline reading m/m: 0.5% vs. 0.1% expected
  • June headline reading m/m: downgraded from 0.5% to 0.2%
  • July core reading m/m: 0.6% vs. 0.3% expected
  • June core reading m/m: downgraded from 0.4% to 0.2%

The July retail sales report surprised to the upside since the headline reading came in at +0.5% (+0.1% expected) while the core reading printed a 0.6% increase (+0.3% expected).

But on a more downbeat note, the previous headline reading was revised lower from +0.5% to +0.2%. And the same was also the case for the core reading, which was downgraded from +0.4% to +0.2%.

Looking at the details of the report, the stronger growth in retail sales wasn’t really broad-based since only 6 of the 13 major retail store types reported stronger growth.

As for the others, only one retail store type was able to maintain the previous month’s pace, while the remaining 6 printed weaker or even negative growth in sales.

Overall, the July retail sales report looked impressive at first, which is why USD bulls tried to bid the Greenback higher when the report was released.

However, the details and the revisions for the previous readings do paint a less impressive picture, so follow-through buying was only limited.

Overlay of USD Pairs: 15-Minute Forex Chart
Overlay of USD Pairs: 15-Minute Forex Chart

Sellers even eventually won out since the July retail sales report was released shortly before word got out that German and Turkish officials were planning to meet.

You see, the spotlight was on the Turkish lira crisis back then. And that goods news caused market players to dump the Greenback in favor of the euro and riskier assets.

What is expected this time?

  • Headline reading m/m: 0.4% expected vs. 0.5% previous
  • Core reading m/m: 0.5% expected vs. 0.6% previous

For the month of August, the general consensus among economists is that the headline value of retail sales will increase by 0.4% month-on-month. And if vehicle sales are stripped to get the core reading, then the consensus is for a 0.5% increase.

Economists are therefore expecting both the headline and core readings to show a deceleration in retail sales growth.

So, what do the available leading indicators have to say?

  • Looking at some of the available leading indicators, total vehicle sales in August climbed by an annualized rate of 16.7 million, which is slightly less than the 16.8 million printed in July.
  • Markit’s August manufacturing PMI report noted that “The strongest growth is being seen in consumer-facing companies, reflecting robust domestic demand, in turn linked to the strong labour market and buoyant consumer confidence.” Perhaps that will translate to stronger retail sales.
  • Markit’s August services PMI report didn’t really highlight the retail trade industry, but it also noted that “it’s clear that domestic demand remains strong.”
  • Next, ISM’s non-manufacturing PMI for August jumped from 55.7 to 58.5. And according to the details of the PMI report, the retail trade industry is one of the industries that reported an increase in growth, business activity, and new orders in August.
  • Moving on, the August NFP report showed that the retail trade industry shed 5.9K jobs. Wage growth did pick up, however, and total non-farm jobs increased by 201K. And hopefully those translate to higher spending.

How about historical tendencies? Do they offer additional insights?

The headline retail sales reading used to accelerate on August, but they’ve been printing weaker numbers (more often than not) in recent years, which does seem to support the consensus for a weaker headline reading. The readings for the last two years were even negative.

And looking at how economists fared with their guesstimates, we can see that there are more downside surprises over the years, so economists are apparently too optimistic.

As for the core reading, there are more instances when the August reading was weaker, which supports the consensus.

And similar to the headline reading, economists also have a tendency to overshoot their guesstimates for the core reading.

In summary, most of the available leading/related indicators are pointing to the possibility of stronger consumer spending in August.

However, that goes against consensus since the consensus is that both the headline and core readings will print weaker increases.

Historical data leans more towards the consensus, though, since the core reading is historically weaker in August, while the headline reading has recently been printing weaker or even negative readings in August.

However, historical data also show that economists tend to be too optimistic with their guesstimates for both the headline and core readings, which skews probability more towards potential downside surprises for both.

But as always, just keep in mind that I’m talking about probabilities here, so there is always a chance that both readings may surprise to the upside. After all, the available and leading indicators do seem to suggest stronger domestic demand.

Also, just keep in mind that if both readings miss expectations, then that usually (but not always) triggers a quick Greenback sell-off. On the flip side  a quick rally is usually triggered if both readings are better-than-expected. And if they come in mixed, then traders usually have their sights on the headline reading.

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