Is The Dollar's Fledgling Rally In Jeopardy From A Retail Sales Surprise?

Advance Retail Sales (APR) (12:30 GMT)
PPI (YoY) (APR) (12:30 GMT)
Expected: 0.4%
Expected: 3.1%
Previous: 0.7%
Previous: 3.2%

How Will The Markets React?

Though treasuries didn?t join in, the dollar and US equities had one of their most active days in recent history. As was explained in detail in the Dollar Daily report (, there was a smattering of US economic data interspersed with a few key words from a couple notable figures from Capital Hill. Starting off with the morning?s data mixture, we get a clear sense of what sent investors in the stock market scrambling to unload their shares. The March trade account printed a $63.9 billion the widest shortfall in six months. Some of this sentiment was offset initial jobless claims to a four-month low; but the real rally point for bulls were bullish comments from Treasury Secretary Henry Paulson and President George W Bush. Paulson didn?t say anything novel with his affirmation that “a strong dollar is in the nation?s [best] interest.” More unusual was President Bush?s promise that his administration would lower trade barriers in order to attract foreign investment into the US - certainly a welcome policy point. Now that volatility has been raised, traders are left to wonder whether it will last. Considering tomorrow?s economic calendar will bring one of the top market moving indicators, it may - if for only one more day. The Commerce Department is expected to report a 0.4 percent rise in retail sales for the month of April. While this consensus is already reduced from the previous period?s pace, it may still be too generous. Recent data has certainly led market participants to revise their ‘unofficial? estimates well below economists? predictions. The adjustments began on Tuesday with the Redbook report. Considered the Fed?s retail sales report, the indicator reported a considerable 4.1 percent drop. Today, the skepticism only deepened. More than a few blue chip firms announced monthly sales numbers that missed expectations. What?s more, the ICSC Chain Store Sales report printed its biggest drop on records going back to 23-years. Considering the dour outlook all of this has produced though, a good number could trigger rallies.
Bonds - Treasury 10-Year Note Futures
Though the dollar has broken cleanly from its range near two-year lows, and the benchmark equity indices have chalked up declines of well over 1 percent, treasuries have passed the day relatively unchanged. Through today?s data and official chatter the debt market kept a skeptical eye as few of these events have actually altered the outlook on monetary policy. What may finally get Treasuries in gear is Friday?s retail sales report. Since there is a very tangible divergence between the market?s outlook and the official consensus, a surprise may surely be in store. Should recent, periphery sales data be correct and tomorrow?s number actually drop, T-note futures may make a test of range highs and the falling trend at 108-15. A shock on the other side could put 107-24 under pressure.

The US dollar has staged a massive rally against most of the majors, but the markets will likely keep their eyes trained on the ever-popular EUR/USD. The pair has dropped below resistance at 1.3525, despite the fact the ECB signaled intent to hike rates in June. However, some perceived hesitance to raise the benchmark beyond 4.00 percent helped contribute to some Euro weakness. EURUSD declines look primed to continue, but the release of US retail sales on Friday could derail the pair?s direction. Spending in the retail sector is predicted to slow to 0.4 percent during the month of April, though the figure could perhaps be even worse, as sales in the Redbook report proved weak while Wal-Mart reported the sharpest decline in monthly sales ever. Nevertheless, technical factors are clearly in favor of dollar gains, so sentiment will have to turn extremely bearish once again to take the currency even lower.

Equities - S&P 500 Index
The S&P 500 Index showed its steepest drop since March 13th today, as the benchmark closed down 1.4 percent to 1,491.47. Financial shares accounted for more than a fifth of the loss in the S&P 500, dropping 1.4 percent as a group on speculation that interest rates will limit demand for home loans, as the FOMC signaled that they will likely leave their benchmark steady throughout most of this year. Citigroup, the largest U.S. bank by market value, fell 92 cents to $53.20 while JPMorgan, the third biggest, fell $1.20 to $52. Homebuilders also showed hefty declines, as the sector fell 2.7 percent as a group. Lennar Corp., the nation’s largest builder by revenue, declined $1.07 to $42.10 while Centex Corp., the third largest, slid $1.57 to $45.53. Retailers did not fare well either, as shares of upscale department store Nordstrom dropped $1.57 to $54.19. Furthermore, Retail Metrics Inc. reported that a record 80 percent of retailers missed analysts’ estimates in April.
The release of Advance Retail Sales on Friday morning could deal another blow to the S&P 500, as the figure is predicted to slow to 0.4 percent during the month of April from 0.7 percent during the month prior. However, given the dismal reports from US retailers for the month, Friday?s figure could perhaps be even worse. With US equities showing some fragility, it is worth noting that Gold dropped $16/oz today. The last time this happened was February 27th, the day before Shanghai stocks plummeted more than 9 percent and sent equities around the world reeling.