Retail Sales Tales!

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By Mike Conlon | January 21, 2011

This morning we received three different retail sales reports from the UK, Canada, and New Zealand, each telling a different story about economic progress.  Retail sales are a good barometer of consumer expectations and confidence, and can sometimes forecast inflation fears.  The logic is that if you think prices are going up, you may want to buy today rather than chance paying more in the future.

In New Zealand, retail sales increased 1.5% vs. an expectation of 1.1%, though most of that was led by cars and energy as the core rate actually fell for the second straight month.  So traders need to be careful as this actually shows weakness and not strength, as consumers are more focused on debt reduction.

In the UK, retails sales declined .8% vs. an expected .2% decline for the largest December decline on record.  Higher prices and inclement weather is the excuse given, but overall this may be a sign that already inflation is taking a toll.

In Canada, retail sales figures came in much better than expected, posting a gain of 1.3% for November vs. an expectation of .4%.  This shows economic strength and resilience as the Canadian economy appears to be picking up steam.

In the Euro zone, German business climate and expectations figures came in better than expected, though the current assessment figures came in lower.  This improved outlook has helped buoy the Euro higher this morning.

Lastly, my “ I told you so moment” :  the Dollar is weaker today as yesterday’s prevailing thought that China would attempt to tighten monetary policy seems unlikely as it is looking more doubtful that they will raise rates as they are potentially facing a liquidity problem in overnight lending.  Yesterday I mentioned that I thought the market had it wrong and that I didn’t think they would move to tighten. It’s always something!

In the forex market:

Aussie (AUD):  The Aussie is mostly higher on the Chinese sentiment reversal that occurred overnight.

Kiwi (NZD):   The Kiwi is mostly lower on disappointing retail sales figures, despite the headline number.  However Dollar weakness means that it is higher against at least one currency.

Loonie (CAD):   The Loonie is higher against all but the Euro despite lower oil prices.  Retail sales figures came in better than expected and a bit of inflationary pressure could reverse dovish comments made by the BOC earlier this week at their interest rate announcement.  (Click chart to enlarge)

Euro (EUR):  The Euro is higher across the board as anti-Dollar sentiment and a renewed economic outlook from Germany looks positive for the Euro zone.  However, Fitch rating agency has warned of potential future downgrades which may be tempering Euro gains today.  (Click chart to enlarge)

Pound (GBP):   The Pound has rebounded from earlier losses to now posting gains vs. the majority except Euro.  While retail sales were worse than expected, the prevailing thought is that inflation is to blame for the result which should provide Pound hawks with more ammo to support their notion that the BOE needs to be less accommodative with monetary policy.

Dollar (USD):   The Dollar is weaker across the board as the sentiment that China would tighten has been reversed.  Stocks in the US are lower to start the morning and there is no news on the docket that would be a potential game-changer.

Yen (JPY):  The Yen is higher against all but the Pound and Euro as signs of diminishing deflation are starting to emerge.  Japan has been mired in a deflationary “death spiral” for some time and the government has raised its economic assessment for the first time in 7 months.

We can learn a lot from consumer behavior which manifests itself in the form of retail sales figures as this can give us clues as to where each nation may be with regard to inflation.   Higher retail sales can mean that inflation expectations are higher for the future; and lower sales can be a sign that inflation is already a current concern.

It is no secret that global inflation is on the rise, particularly in emerging markets countries, and the question remains whether or not Central banks will be quick enough to act or whether they will be content to allow inflation to scare people into consumption.

While this may deemed “necessary” by some (Bernanke et al), it really is unfortunate that they feel that the only way to economic recovery is through the potential hardships of the people they are meant to govern.

This story isn’t finished folks, not by a long shot!

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