The US dollar is holding onto its gains as the rate cuts by the Federal Reserve and the fiscal stimulus package announced by the Bush Administration leads traders to believe that the downturn in the US economy will be quick and shallow.
Whether or not this is true will be decided by tomorrow’s retail sales report. Consumer spending encompasses 70 percent of the US economy. In the month of December, retail sales dropped for the first time since June. January retail sales figures are expected to drop for the second month in a row by 0.3 percent, which would be the first back to back decline since December 2001. With non-farm payrolls negative last month, chain store sales and consumer confidence declining, it would be surprising if retail sales rebounded. However in the past six years, we have never seen a back to back decline which means that this downturn may be unlike any other. The credit and derivatives driven market turmoil is new and housing has not collapsed like this in decades. As a result, it may be too optimistic to believe that the downturn in the US economy will not last. What we do agree with is the fact that other countries will find themselves behind the curve. When US growth finally stabilizes, many other countries like the Eurozone and Australia may be only at the beginning of dealing with their own slowdown. This scenario is still months away. In the more immediate future, growth is the Federal Reserve’s primary focus. Don’t forget that the futures curve is still pricing in 75bp of easing by June.