In yesterday’s lesson we discussed Non Farm Payrolls (NFP’s) and why this is one of the economic indicators that causes the biggest moves in the markets. In today’s lesson we are going to discuss another economic indicator which can create large amounts of market volatility, Retail Sales.
The retail sales number is released at 8:30 am on or around the 13th of each month, and is an estimate of the sales of goods by all retail establishments in the United States. These goods fall into the personal consumption expenditures category, which as we discussed in our lesson on GDP, makes up over 65% of the US Economy. Although the number does not include anywhere near the data that is included in GDP, since this number is released for each month (where GDP is released for each quarter) it is closely watched by the Fed and other market participants as a timelier indicator of what is happening with the consumer.
In addition to the widely reported headline number, the report that is issued along with the retail sales number includes a breakdown of retail sales growth by category. With this in mind the report is not only a good indicator of overall consumer activity, but also for how different parts of the economy such as automobile, restaurant, clothing and electronics sales are fairing. If you are trading the stock of a company which sells products related to one of the categories reported in the retail sales release, then it is obviously important to understand that what happens with the growth of that category is most likely going to have a direct affect on the price of the stock that you are trading.
Like many of the things that we are discussing, the retail sales number is looked at not only for its timely reporting on growth in a large part of the economy, but also for its predictive powers regarding inflation. A healthy economy should show strong retail sales numbers, however if the number grows too quickly then there is a danger that growth in consumer demand will outpace supply growth, causing prices to rise and forcing the Fed to raise interest rates to reign in growth. To predict how the market will react to increases or decreases in the retail sales number, an understanding of where the economy is in the business cycle as we learned in our lessons on the subject is necessary.
If for example we are in a period where inflation is thought to be contained and growth is a worry, then a strong retail sales number should rally the market. If however we are in a high growth period already, then a strong number can cause market sell offs as participants anticipate Fed interest rate increases to reign in growth.
As with every economic indicator we study, remember that markets anticipate, so the market reaction will more times than not have a greater dependence on where the number comes out in regards to the consensus estimates, rather than how strong or weak the reported number is in relation to previous numbers. If the number comes out in line with estimates then at least in theory this should already be priced into the market and therefore market volatility after the number should be contained. If however the number comes in off estimates then you can see dramatic market volatility, the size of which is going to depend on how far the number comes in off estimates and where we are at in the business cycle.
As with all the indicators we are studying you really have to follow the number for several releases to get a feel for what the market is focused on and how it is going to react under different scenarios when the number is released. With this in mind, I will be posting a discussion piece in the comments section of this lesson on InformedTrades.com the day the number is released so we can all discuss and start to get a feel for this in real time. If you would like an email when that discussion begins you can click article tools once logged into the forum and then subscribe to thread and you will receive an email notification when that discussion begins. If you are watching this video on Youtube I have included a link to the lesson in the description section of this page so you can join the discussion there as well.
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WEEKLY Forex Economic Calendar: 24 Jan Tue
09:30 GB- Brexit Court Ruling
15:00 US- Existing Homes Sales 25 Jan Wed
00:30 AU- CPI
09:00 DE- IFO Survey
15:30 US- Crude 26 Jan Thu
09:30 GB- GDP
13:30 US- Weekly Jobless
14:45 US- flash Service PMI
15:00 US- New Homes Sales
23:30 JP- CPI 27-Jan Fri
13:30 US- Durable Goods
13:30 US- GDP
15:00 US- University of Michigan
Markets are digesting the U.K. Supreme Court ruling today, which upheld a lower court saying that Parlimentary approval is needed for the Prime Minister to invoke Article 50, which puts the U.K. exit from the EU into motion. The Court also ruled that the approval of the devolved Parliaments in Scotland, Wales and Northern Ireland was not required. So Parliament will have to pass a law invoking EU article 50. There is no worry that this should impact PM May's end of March deadline for Brexit.
If approval of the devolved parliaments had been required, this could have become a messy proceess with Scotland opposing Brexit.
Late Monday U.S. Treasury Secretary-designate Mnuchin muddied the waters when he said that an excessively strong US dollar may be negative in the short term. This report sent the USD lower. Details of the Trump dollar policy are awaited. Use the EURUSD 1.0700 line as a key benchmark of USD strength or weakness.
The U.S. economic calendar today includes: flash Markit PMI, Existing Homes Sales and the Richmond Fed Survey.
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