The dollar has pulled back this morning as US economic data proved to be broadly bearish and unsupportive of speculation that the Federal Reserve is hawkish enough to consider raising interest rates before year end. US Advance Retail Sales fell more than expected by 0.3 percent in August, marking the second consecutive month of contraction. Excluding autos, the figure was even worse at an 8-month low of -0.7 percent. Looking at a breakdown of the index, spending in nearly every component declined, led by building materials, gasoline stations, and department stores. It is worth noting, though, that this index is not adjusted for inflation, so the drop in the gasoline station component may only be indicative of the drop in gas prices during August (rather than a drop in demand). Nevertheless, consumption is widely anticipated to be a soft spot for the US economy going forward, as the housing sector has yet to recover for some time, credit conditions remain tight, and the unemployment rate rises. In fact, during August, the unemployment rate surged to a 5-year high of 6.1 percent with non-farm payrolls contracted for the eighth consecutive month. Looking at the other release on hand, US producer prices fell by the most in nearly 2-years during August, as the index tumbled 0.9 percent for the month and slowed to an annual pace of 9.6 percent from 9.8 percent. The decline was led, unsurprisingly, by energy as crude oil plummeted over the course of the survey period. However, excluding this fact, producer prices rose 0.2 percent during the month thanks to continued food cost increases.
Overall, the data should quell some of the speculation that the Federal Reserve will move to raise rates before year end, as we see that fed fund futures are now pricing in a slight 10 percent chance of a 25bp cut at the next meeting on September 16. While this is highly unlikely, that sort of sentiment may be just what dollar bears need to get back in the game. Meanwhile, S&P 500 futures were down even ahead of the 8:30 EDT releases, but it remains to be seen if the news will have lasting impact given lingering uncertainty about the status of Lehman Brothers. Indeed, any sort of announcement of a potential buyer or resolution for the troubled firm could lead equities (and thus, carry trades) higher. See our latest forex correlations report for more on the link between US stocks and forex carry trades.
[I]Source: Bloomberg
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[B]S&P 500 Futures (Intraday Chart)[/B]
[I]Source: Bloomberg[/I]