Retail sales proved to be a disappointing trigger for the fundamental activity scheduled for the week. Dealing with higher fuel costs and bad weather, discretionary consumer spending failed to meet the markets benchmark consensus. From price action in the majors, it was easy to see the market was in a trance before the US data hit the wires; and subsequently let down when the numbers flashed lower than traders had anticipated.
Leading the move, the deeply liquid EURUSD corrected off of a 1.3155 low prior to the New York session before charging 25 points above 1.32. In a more controlled fashion, USDCHF a 25-point range dominated for much of the overnight session before swinging 90 points lower to 1.2170. Though GBPUSD was on the move, it was still seemingly sapped for volatility. The pair rallied 80 points from intra-day lows to 1.9350 before finding resistance. Finally, the Japanese yen added to its advance after USDJPY slipped below 117.25 on its way to 116.50.
Traders across the globe are increasingly becoming aware of a general shift in the behavior of the currency market. Since the raucous a few weeks ago that upset the untouchable carry trade, the peak hours of volatility have shifted from the US to the Asian session. No doubt, this development helped to drain momentum from the dollar Tuesday morning even after the Commerce Department reported weaker than expected sales activity. According to the data, spending on retail goods rose 0.1 percent in February, falling short of the 0.3 percent pace predicted. However, the real disappointment didnt come from the headline number. The devil so to speak was in the details. Many of the key components in monthly report made unexpected contractions. Activity related to the housing sector was particularly hard hit with building materials sales dropping the most since September, while those of furniture and electronics dropped 1.7 percent and 0.3 percent respectively. Another surprise came from the clothing group, which printed its biggest drop in sales activity since September 2005 in a 1.8 percent decline. While this may be attributable to frigid weather through most of February, it speaks more broadly for growth expectations. With the housing and manufacturing sectors already ailing, and business investment expected to be curbed by the uncertainty in equity markets, the consumer is the last pillar of strength for worlds largest economy.
When the sting of the retail report wore off, market participants looked for any other news to guide them to profits. From the economic indicators docket, there were few other reads to generate enough fundamental interest to push the dollar. The lagging business inventories number for January was largely overlooked, especially after coming in line with expectations for a modest 0.2 percent pick up. One interest aspect of the report was its correlation to todays retail report. After todays modest sales report, expectations for decreased factory activity has grown. Outside of the calendar, the currency market was also tuned into a conference on the competitiveness of US capital markets hosted by Treasury Secretary Henry Paulson and attended by some of the biggest names in the world of finance. A few of the key topics to be raised were the detriments and benefits of Sarbanes-Oxley and trade imbalances with China.
US stocks spent another day in the red as the weak retail figure added to the depression in the depressed mortgage sector. By 15:20 GMT, the NASDAQ Composite was off the most on a 0.46 percent drop to 2,391.18. At the same time, the Dow was 0.44 percent lower at 12,264.63 while the S&P 500 lost 0.35 percent to move to 1,401.68. From the active movers list, the suspension of New Century shares shifted the attention to other sub-prime lenders. Accredited Home Lenders plunged 54.3 percent or $6.19 to $5.21. Shifting the focus back M&A, Citigroup made headlines after boosting its bid for Japanese broker Nikko Cordial to $13.4 billion. Citi shares slipped 1.2 percent to $9.74 in response.
Practice matched theory in the treasury market, as the weak economic data led the benchmark debt instruments higher through the morning session. The ten-year note was trading 7/32nds higher at 100-26 by 15:20 GMT as its yield lost 3 basis points to 4.522. Bonds jumped 13/32nds to 101-08 while yields lost a similar 3 basis points to 4.672.