Fundamentals had to catch up to the dollar?s breakout eventually, but bulls probably could have down with a little more time than a day to verify the move. However, the drop in retail sales and wholesale inflation was not as bad as the headline numbers had suggested, and this could buy the currency some time to round up a few more positive indicators to stoke momentum.
While the majors were retracing some of the dollar gains from yesterday, most of the pairs were hanging back from their major levels. For EURUSD, a rebound to former support 1.3520 was rejected after the pair put in a triple touch at 1.3465 overnight. The British pound fell just short of testing the pivotal 1.9850 level against the greenback, though spot was hanging close to the area. Putting in another contrarian move, USDJPY rallied 75 points after hitting an overnight low 119.50. Finally, USDCHF was relatively stable with choppy price action between 1.2170 and 1.2215.
After the dollar broke higher on seemingly unfavorable data yesterday, the outlook for sustained strength immediately turned sour. While the greenback may have been able to overlook a ballooning in the trade deficit, many thought today?s retail sales report was an indicator on a completely different level. By now, the markets have been desensitized to a sizable short fall in the trade account after setting new record highs through multiple months just a short while ago. On the other hand, consumer spending has been the key reference for every economist and policy maker that has forecasted a soft landing for the world?s largest economy. Shouldering this considerable responsibility, the markets were furiously lowering their projections on the retail sales release, trying to accurately incorporate recent periphery data into the forecast. However, speculators may have been a little ambitious in factoring the drops in the Redbook and ICSC Chain Store Sales numbers into their outlooks. The Commerce Department reported a 0.2 percent drop in sales in April - certainly lower than the initial 0.4 percent consensus formed earlier in the week, but far better than some had feared. From the breakdown, the usual suspects made the line up. Auto sales fell 1.0 percent while those of building materials dropped 2.3 percent. The biggest surprise though was the seemingly modest 1.7 percent rise in gasoline receipts despite the rally to record high prices at the pump. Further making the decline in the retail sale number bearable, government data showed in a separate indicator that business inventories actually contracted for the first time since July of 2005 while purchases for the same period surged 1.4 percent. This certainly raises expectations for production activity.
Moving beyond the day?s headline event risk, politics were once again flying across the dollar?s radar. This morning, the Bush administration reached a deal with Democrats to incorporate labor standards into a free trade agreement to get things moving. This may help to grease the wheels on other trade bills that have been held up because of diverging partisanal believes. With the US government seemingly on a path to utter protectionism, this is a break in the clouds for dollar traders.
Looking ahead to next week, it is clear that the next anchor for fundamental risk is Tuesday?s consumer inflation report. Like the lead up to today?s retail sales report, the market is busy revising its unofficial outlook for April CPI. The Labor Department releases three price gauges that end with the market-favorite CPI. The Import Price Index started things off with a clear disappointment for inflation hawks and dollar bulls by cooling from an annual 2.8 percent pace to 1.9 percent. The Producer Price Index eased fears with its own print today. Wholesale prices passed the month unchanged last month leaving the year-over-year number unchanged at an eight-month high 3.2 percent. From the breakdown, the energy component cooled slightly as the gasoline sub gauge slipped from 8.7 percent to 8.2 percent growth. Take a look at our recent article on the divergence in gasoline and crude prices (http://www.dailyfx.com/story/special_report/special_reports/Could_A_Divergence_In_Gas1178823003711.html) to see why this may create another lowball situation that could set up another positive surprise.
A sharp drop has been followed by a sharp drop for US equities. While some believe the rise was provided on the belief the weak retail report will encourage an eventual cut, it may be just as accurate to say perpetual bulls are not ready to give up on the market?s steady advance without a fight. By 15:50 GMT, the NASDAQ Composite - the biggest loser decliner yesterday - was pacing the rally with a 0.76 percent rebound to 2,553.03. The Dow and S&P 500 gauges were sharing 0.7 percent moves to 13,307.36 and 1,501.90 respectively. The M&A deal book was once again making the market movers column when CME raised its bid for CBOT Holdings. Shares of futures exchange CME were 6.4 percent higher at $530.05 while those of CBOT were up 2.7 percent to $199.15. Switching sectors, graphic processor producer Nvidia impressed the market with a 44 percent jump in quarterly profits. Shares of the tech gained 7.0 percent or $2.29 to $35.11 on its encouraging numbers.
Once again, the Treasury market proved the true leader for sentiment when the fully discounted retail sales surprise left paper relatively unchanged. At 15:50 GMT, the benchmark ten-year note was trading 1/32nd higher at 98-30 after its yield cut a basis point to 4.632. The thirty-year bond matched the notes price after rising 2/32nds to 98-30 which put its yield down a basis point to 4.817.