By Jason Van Steenwyk
he next release of the Retail Sales Ex-Auto report comes just when the Fed appears to be on the verge of enacting the long-awaited “tapering” of its purchase of financial assets. The move would be construed both as a sign of economic strength – the Fed would not, presumably, embark on a tightening path, without some sign that the recovery was on some certain footing. On the other hand, investors love permissive monetary policy, and tend to react petulantly any signs that Chairman Bernanke & Co. are taking away the punch bowl.
However, in many ways, the currency investor looks at the problem from the opposite direction: Tight monetary policy at the Fed tends to bode well for the integrity of the dollar. Easy monetary policy raises the ugly specter of inflation, and the erosion of the dollar.
And so all eyes will be on the Census bureau when it releases the Retail Sales Ex-Auto report.
Our assessment: The current expectation is growth between about 0.2 and 0.5 percent over the previous figure, with the fat part of the bell curve towards the higher end of that range. Our colleagues at EFX News are forecasting a 0.6 percent increase,which would be quite strong. If the report comes in significantly better than expectations, the Fed could take that as a sign of continuing recovery. It would certainly be a sign that the longsuffering consumer was getting back into the game, buoyed in part by a resurgence in home prices over the past 12 months. That, in turn, would signal that the economy was closer to the point where the Fed can comfortably begin to (slowly and gently) turn off the easy money spigot. Which, in turn, would potentially be a powerful signal that yes, this Fed can take measures to control possible inflation.
We’ve seen this theoretical position corroborated by actual market events recently, as the dollar has, in fact, gained ground against other currencies after previous positive retail sales reports. As the Bloomberg story notes, the last time we had a positive retail report, the Bloomberg U.S.. Dollar Index gained 0.7 percent in the largest intra-day movement since the beginning of the month – and then rose an additional – 0.5 percent in after-hours trading that same evening.
As additional confirmation, we saw the dollar drop the largest amount in 8 weeks on September 6th, when the Bureau of Labor Statistics released some dismal employment figures. Yes, unemployment fell, but that was because thousands of people dropped out of the labor force, and drove the labor force participation rate to the lowest level in 30 years. Such news indicated labor market weakness, and was widely seen to give ammunition to the doves on the Federal Open Market Committee.
On the other hand, if the Retail Sales ex-Auto report comes in weaker than expected, or if we start getting downward revisions in previous months’ data, we may see some selling of the dollar as markets adjust.
The basic equation to bear in mind: Good economic news is good for the dollar, because it will enable the Fed to finally enact a more disciplined monetary strategy. Bad economic news is bad for the dollar because it will tend to prompt the Fed to keep up the big asset purchases under QE3.
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