US Retail Sales: Constructive Underlying Spending Ton – TDS
Research Team at TDS, suggests that the weaker auto sales should be a
key source of drag on US headline retail sales activity, pushing the
pace of spending down for the third consecutive month.
“In March, TD expects total retail sales activity to post a 0.1% m/m drop, following the 0.2% m/m decline the month before. Much of the weakness in the headline is due to the sharp drop in auto sales (excluding this component will leave sales higher by 0.4%), though a rebound in gasoline prices will offer a partial offset. As such, retail sales excluding autos and gasoline is forecast to increase by a subdued 0.2%.
Core retail sales activity—which will be key in gauging the tone of underlying spending momentum—should also rise modestly, gaining 0.2% m/m. This reflects a small rebound in spending activity after momentum essentially stalled last month. In the coming months, we expect this upside momentum in core spending to be sustained as personal spending rebounds from the Q1 slump.
Risks to the forecast: The March retail sales report will take on added importance as the market is wrestling with a steady downwards set of revisions to Q1 real GDP growth. We see downside risks to the March core spending number in appreciation of the cautious tone taken by households. Note that positive revisions to the prior months’ estimates, however, could color the market’s interpretation of this report.
USD: We think currency markets are viewing the data asymmetrically, and thus, are more prone to react negatively on a data miss. If we are right on the downside surprise in retail sales, we think this will sustain pressure on the broader USD as it will only add to the slew of downward revisions to Q1 growth tracking.
Moreover, we think Yellen’s speech several weeks ago has also placed greater importance on inflation data. Should we be wrong and retail sales surprise to the upside, we expect a rally will eventually be faded. Given our forecast risk, we look for EURUSD to test topside resistance in the 1.1450/1.1500 zone.
USDCAD may be the cross of the day however with the pair having broken below very significant support of 1.2830. Though the Bank of Canada expected to remain sidelined and sound cautious, we think the risk of the currency remaining offered is non-trivial. Next major support level comes in around 1.2650.”