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    Upbeat January retail sales data briefly lift dollar

    Retail sales data out of the United States today showed consumer spending remained buoyant in the first month of the year. Total retail sales rose by 0.2% month-on-month in January, beating estimates of a 0.1% increase. The data is even more upbeat when considering the revision to December’s figure, which was revised up to 0.2% from -0.1%. On a year-on-year basis, retail sales were up 3.4%.

    The ‘control’ measure of retail sales, which excludes sales of volatile items, rebounded even more strongly, rising by 0.6% over the month. This was double the forecast of a 0.3% increase and a sharp improvement from the previous month’s 0.3% decline. The ‘control’ measure is watched closely by policymakers as it shares similar components used to calculate consumer spending in GDP estimates and is therefore a good indicator of GDP growth.

    The best performing sectors in January were motor vehicles and parts dealers, grocery stores, building material dealers, and online stores. Motor vehicle sales look set to enjoy another strong year after car sales rose to record levels in 2015. This helped the struggling manufacturing sector to partly offset the weak overseas demand. The biggest drops were recorded in sporting and music stores and in gasoline stations, which was mainly due to the sharp falls in fuel prices.

    Today’s data supports the Fed’s view that US consumers are likely to continue spending as the jobs market improves and the drop in fuel and energy prices boosts households’ disposable income. However, a prolonged period of volatility in financial markets may undermine confidence in the wider economy. Further falls in equity prices would also be a cause for consumers to be more cautious as it would lead to a drop in household wealth levels.

    Fed Chair Janet Yellen this week tried to allay fears that the Fed would ignore the current market developments and stick to its guidance of four rate hikes this year. But she also downplayed the need to reverse the current policy path by cutting rates in the near future. January’s strong retail sales numbers are evidence that the US economy is likely to continue expanding at a reasonable pace even if the recent events lead to a slowdown in the growth rate.

    The US dollar got a lift from the stronger-than-expected rise in retail sales. It rose to 113.16 yen and 1.1223 per euro soon after the data. But the boost proved short lived as the dollar soon reversed course and fell back to around 112.75 versus the yen and 1.1260 dollars versus the euro. The next key data for the US will be next week’s January inflation figures.

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