Thursday August 12, 2004 - 21:11:26 GMT
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US Retail Sales - Another Disappointment
DailyFX Fundamentals 08-12-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Weak US Retail Sales
· Stronger German and French GDP
· Oil Continues to Surge to All-Time Highs
Mixed developments in the Eurozone today failed to garner much momentum for the euro. Both Germany and France reported stronger than expected second quarter GDP. The 0.5% q/q growth in Germany came solely as a result of increased demand for German exports. Domestic demand has been weak and was practically unchanged for the second quarter. France grew by 0.8% in the second quarter. Of the major economies in the Eurozone, France has been the best performer. In contrast to Germany, French consumers have been reaching into their pockets and spending. In the month of June, consumer spending increased 4.2%, which is the fastest pace in 7 years. However, none of this data moved the euro. We saw a brief spike up following the weak US retail sales report, but the gains were quickly erased on news of two small terrorist related explosions in Spain. Based upon the price action, it appears that some traders may have already left for the Olympics, which begins tomorrow, in Greece.
Once again, estimates were too high for US retail sales. As we mentioned in yesterday’s Daily Fundamentals, although auto sales were stronger in the month of July, the weekly Redbook sales painted a slightly different picture. Redbook sales fell every week last month, which meant that the rebound should be weak, at best, and it was. Consumers spent more money on cars and furniture in the month of July, but cut spending on clothing for the second month in a row. The weaker consumer spending in June drove inventories up 0.9% (for the same month). The stock-to-sales ratio, which measures how long it takes businesses to deplete inventories increased from 1.30 to 1.31. Optimists are looking to today’s better than expected jobless claims report and more hawkish minutes from the June 30th FOMC meeting to find reason to rally the dollar. According to the minutes, the Fed could adopt a more aggressive tightening policy to combat “emerging inflation pressures” if resource utilization and inflation increases significantly. Although it is important to take note of the Fed’s hawkish bias, recent data gives them no reason to move ahead with this plan. Tomorrow is another busy day in the US – we are expecting PPI, the trade balance and the University of Michigan Consumer Confidence survey.
Although the British pound is still trapped in a range, the dovish inflation report released by the Bank of England on Wednesday has put a bearish bias on the currency. There are no more scheduled economic releases for the week, which means that barring any significant shocks to tomorrow’s US data, the pound should continue to trade within its range. The mixed data that we have been seeing recently is certainly another cause for concern. We have been speculating for some time that the weak data, particularly from the housing market, may be a predecessor to slower growth. Yesterday, the Bank of England forecasted a sharp slowdown in house price inflation and based upon their resources, they are seeing evidence that the housing market may have “peaked.”
According to the Ministry of Finance’s weekly portfolio data for the week ending August 6th, Japanese investors have once again become strong buyers of foreign bonds. Japanese investors bought ¥1.86 trillion worth of foreign bonds, which is the largest one-week accumulation since the government began publishing the data in April 2001. Oil is like a soap opera these days and that is how the oil market is reacting. One day we hear news that more supply is available and the next there are fresh concerns or supply shocks. Only 2 days ago did Iraq announce that they were resuming oil production after halting production temporarily on threats from terrorists. New threats in Iraq today have prompted oil to rally to fresh highs and settling above $45 a barrel. Even Saudi Arabia’s announcement of spare oil has failed to curb gains. The next big risk for the oil market is Sunday’s referendum on the rule of Venezuelan President Chavez. Venezuela is the world’s 5th largest oil exporter and the market fears that the referendum could cause disruptions in production. The global economy and the world’s central bankers are now at the mercy of oil.
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