Preview: US Retail Sales - Which Way Does US Narrative Develop

Release: Retail Sales m/me (Dec)
Consensus Forecast: 0.3%
Previous: 0.2%
Release: Core Retail Sales m/me (Dec)
Consensus Forecast: 0.3%
Previous: 0.2%
Date/Time: 1/12/12 8:30AM ET (13:30 GMT)
Retail Sales Expected To Post Another Modest Month of Gains

US retail sales are expected to post 0.3% increase for the month of December compared to November.

While that forecast is positive it's only a modest increase, though it does beat the gain seen in November of 0.2%. However, it's not fast enough to propel a sharp increase in the personal consumption portion of GDP. Following a very strong September, which you can see in the above graph, sales have moderated and have not been able to maintain the pace seen in the second half of 2010 an early part of 2011.

The main thesis that there is that consumers it ran down their savings in order to spend more coming into the fourth quarter, that spending was bolstered by an increase in incomes as a result of falling gas prices which we do not expect to continue, as well as an increase in consumer credit which also likely seems unsustainable.

Until wages finally start rising we can expect to see lackluster results from retail sales and other indicators around US consumer spending. In the chart above, we see that the annual pace of average hourly earnings have been in a steady decline since the onset of the Great Recession and until that changes my outlook for the US consumer will be skewed towards the downside.

Now, on the positive side consumer confidence has increased as the labor market has managed to add about 140,000 jobs per month for the last four months and the unemployment rate has dropped to 8.6%.

We also saw consumers taking on more credit in November as they felt more confident about their financial situation and about labor market conditions. Will this continue?

3 Key Scenarios for US Retail Sales:

General Context: At the same time as the US retail sales report is released we will be heavily focused on the ECB interest-rate decision as well as the press conference with ECB President Draghi. Therefore that announcement may suck some of the oxygen out of what is so far been the most important fundamental report from the US this week.

Still it may actually serve as an interesting juxtaposition as we anticipate the ECB to show continued concern about weaker growth prospects while in the US there is some momentum recently in the data and the consensus forecast of a 0.3% increase should continue to push the 'growth divergence' story between the US and Europe.

Therefore, it could set the table for the dollar to gain further against the euro, but it will be interesting to monitor the dollar's reaction against other currencies such as the higher-yielding commodity bloc.

1. Positive Release – Sales Beat Expectations, Climb 0.5% or Higher: If we see a positive release, one which beats expectations handily – say a 0.5% increase or better – that should help to bolster the stock market in the US as well as 'risk on' sentiment. Of course we'll have to be cautious and have an eye on the ECB press conference.

Still, if risk on sentiment prevails from a stronger than expected release we could expect to see a general 'risk on' dynamics play out where the Australian, New Zealand, and Canadian dollar gain at the expense of the safe haven dollar and yen. The euro will have its own issues and a strong report from the US could help the dollar gain against the euro if we indeed are seeing a breakdown of the correlation between positive US fundamental data the euro rallying along with other higher yielders.

2. Status Quo – Sales Grow 0.2% to 0.4%: If retail sales come in at the consensus forecast of 0.3%, +/- 0.1%, that should continue the general theme we've seen recently which is the US recovery has gathered some momentum. That should be mildly positive for equities and risk sentiment. However, because of the issues we described above regrading the pressures on consumer spending – falling wage growth – we would have to be cautious going forward.

3. Weaker than Expected – Sales Rise Tepid 0.1%, are Flat or Negative: If we have a rise of 0.1%, or if sales are flat or negative, well that undercuts the momentum story in the US and would likely precipitate selling in equities and a move towards safety as the engine of US growth is consumer spending and it would have faltered in December. This scenario should help the Japanese yen, US bonds, as well as the dollar against the higher-yielding, commodity currencies.