FX Ignores U.S. Retail Sales But Trade War Rhetoric Concerns

A third consecutive contraction in US retail sales threatens the enthusiasm about the US economy this year. The chart below shows the other two occasions when retail sales fell for for 3 straight months. The yen was the top performer yesterday, while the euro lagged.

US Retail Sales % Change 2011-2018

Economists began lowering their Q1 US growth estimates below 2% on Wednesday after a soft reading on retail sales. The consensus was for a 0.3% m/m rise but spending was down 0.1%. It was the first time since 2012 that sales had contracted for three straight months. The details were also weak, with the control group up 0.1% compared to +0.4% expected.

A sign of trouble?

That’s doubtful. The dip in sales comes after several strong months late last year and numerous data points have been strong, including jobs and sentiment data. The tax cut may also surely provide a tailwind to growth in the months ahead. That sentiment was reflected in the market reaction to the report. The US dollar dipped on the headlines but recovered shortly afterwards.

What’s more pressing is the path of inflation. On that front, US PPI was a touch on the hot side Tuesday at 0.2%. Politics is also an endless soap opera but the main focus right now should remain the steel and aluminum targets due in two weeks and how affected countries respond.

Also note that equities and USD/JPY have lately struggled to hold intraday gains. Ten-year Treasury yields are also near the lows of the month. Those might be early-warning signs about trouble in broader markets.

Traders are increasingly concerned about protectionist rhetoric and so far Trump’s talk far exceeds his actions but a few more steps towards a trade war could spark a quick rush to the exits.

Finally, Bitcoin fell below the March lows on Wednesday. That was partly caused by Google’s (NASDAQ:GOOGL) decision to stop accepting advertising from ICOs. The February low of $5,920 marked the bottom of the Head & Shoulders formation. Bears are looking for a retest.

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