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For the month of October, US retail sales rebounded by 1.4%, beating the consensus of a 1.0% rise. This was the fastest pace of increase since August this year. Core retail sales also posted an uptick but missed the forecast of a 0.4% increase. Components of the retail sales report showed that clothing, personal care, and department store sales were higher during the month. Furniture, electronics, and building supplies sales, on the other hand, all posted declines.

Now, while everyone was out celebrating that October retail sales propped up, there was some piece of data that glared out to me like a sore thumb. What did I find? Behind the ‘positive’ headline results in October was a notable downtick in September’s figures! The headline data showed that retail sales fell by 2.3%, much more than the 1.5% decline posted last month! Meanwhile, core data dipped from 0.5% to 0.4%.

What caught my attention here is the large discrepancy between the headline and core figures. Take note that the core data does not include automobile sales, indicating that perhaps the drop off in retail sales lies in this category. I felt that something was amiss here and this hunch was backed up when I out yesterday.

As I walked through a dealership, I overheard someone saying that automobile sales sunk by 14% in September, which was much more than previous estimate of those economists from Bloomberg. It seems to me that after the end of the Cash-for-Clunkers program ended back in August, automobile sales took a serious hit as consumers were left without rebates.

Surprisingly, however, October automobile sales picked up, rising by 7.4%! It looks like those automobile sales are playing a crucial role in headline retail sales at the moment. The fact remains: retail sales, despite the Cash-for-Clunkers program expiring, managed to pick up.

What will this mean for risk sentiment? Moreover, what does this mean for the beloved dollar?

We all know the answer to that one. Once again, the dollar’s price action after the retail sales report was released revealed the vital role risk sentiment plays in today’s current market conditions. The greenback fell against the other riskier assets and currencies. It didn’t matter if September’s retail sales results were revised downwards. It didn’t matter that other economic reports released during the same time came out worse than expected. Well, Chairman Ben Bernanke’s comments that the Fed would ensure a “strong dollar” caused some volatility in the USD for a while. At the end of the day, though, the dollar still sunk.

If you take a look at the EURUSD pair, you’ll see what I’m talking about. The EURUSD pair, after sinking to 1.4880 on Bernanke’s pro-dollar stance, eventually lost momentum and quickly soared to 1.5000 again exposing the tight grip risk sentiment has on the market.

As 2009 comes to a close, it seems that optimism stemming from the on-going economic recovery grows stronger. As equities and currency rise, consumers are becoming more confident and thus, making them more open to spending. Just yesterday, the US equities markets reached their new yearly highs with the Dow and the broader S&P 500 closing at 10,406.96 and 1,109.30, respectively. Seeing that the stock exchanges have been moving up, you’d be led to believe that the economy’s outlook is on the upturn as well.

As we enter this holiday season, I dare say that retail sales could still rise for the two remaining months of 2009. As we all know, Christmas is the time of giving, hence, of shopping as well. During this period, retailers give out huge holiday discounts in their effort to boost sales. Rebates, mark downs, and other holiday promos can be found everywhere! This could very well factor into another jump in consumer spending. Given the factors above, we could at least say that retail sales for the coming two months, November and December, are unlikely to dip. Now, if only I could convince Santa leaves the keys to a new car in my sock this year…