US Retail Sales Preview: Dollar set for a discount as low expectations may be insufficiently low

Neil Young, New Order and many others sang about the relentless American consumer – yet even this fervent shopper takes an occasional break. The economic environment has been softening, implying a weak outcome and a blow to the US Dollar. 

Here is a preview for US Retail Sales figures for October, due on Wednesday at 13:30 GMT.

Retail Sales tend to rock financial markets, and the last three reports were positive

Consumption is roughly two-thirds of the US economy, the world's largest, and the Retail Sales report is the all-encompassing release of hard consumption data. Consumer sentiment surveys are published prior to this one but consist of shopper intentions, not real data.

The past three reports exceeded economists' expectations and were robust also in absolute terms. In September, the volume of sales increased by 0.7%, more than double the early estimates. 

US Retail Sales. Source: FXStreet 

However, these three consecutive beats are a rarity – such a winning streak last occurred in 2010. Merely on the basis of statistics, there is room for disappointment in the October data.

The economic calendar shows the consensus foresees a soft outcome – a drop of 0.3%. This is based on a decline in consumer sentiment and other leading figures. However, this caution may still be an overestimation. 

Another reason to expect weakness stems from anticipation toward November and the Black Friday sales. Some consumers may be holding back ahead of the shopping bonanza. 

Retail Sales potential reaction in the US Dollar, stocks and Gold

If my projection above is correct and sales disappoint, the US Dollar would decline as investors would price a lower path for interest rates. Gold would take advantage of lower Treasury yields. 

In case of a fourth consecutive beat, the Greenback would grind higher while the precious metal would struggle. 

What about stocks? In general, good news for the economy is bad news for equities in response to fear of higher borrowing costs, while weak data implies lower rates. Nevertheless, shares of consumer-facing companies will likely rise with strong sales and fall with weak ones. 

Headline Retail Sales have been leading the market responses in recent months, but in case they come out within estimates, the Retail Sales Control Group will likely have a bigger say. It excludes vehicles, gasoline, building materials and food services, which may make it too limited. 

Final thoughts

All in all, there are reasons to expect a slight retreat in consumption, an outcome that would weigh on the US Dollar. The Producer Price Index (PPI) report is due at the same time, but will likely have a minor impact, as it is overshadowed by both the retail report and the Consumer Price Index (CPI) that will have already been published on Tuesday.