Could US Retail Sales Data Redirect FOMC’s Decision?

Economists expect US Retail Sales to have risen by a modest 0.4% in February. Robust consumption figures in previous months open the door to an upside surprise.

Surge in the dollar could serve as a selling opportunity ahead of a potentially dovish Fed. Even war cannot stop America’s shopping extravaganza and retail sales figures for February capture the time before Russia invaded Ukraine.

There is room for an upside surprise in this key economic indicator, providing a boost to the US dollar. Only a temporary surge. US Retail Sales jumped by 3.8% in January and the all-important Control Group leaped by 4.8% in the first month of 2022.

That positive shock has been considered as compensation for a crash in December’s volume of sales, and both figures as distortions related to changing seasonal habits, Christmas shopping began earlier due to supply-chain worries.

However, a broader look at sales shows a more consistent pattern of generally positive expenditure. Americans have more money in their pockets due to a booming labor market and higher wages.

Moreover, rising inflation pushes shoppers to buy earlier, before prices rise. More often than not, retail sales figures have been beating estimates. Since America embarked on a massive vaccination scheme, most releases have substantially beat estimates. That may happen again, especially as expectations are low.

For February, economists expect some cooling down in sales growth, with an increase of only 0.4% in both the headline and core data.

If that is an underestimate, how will markets respond? These important statistics; roughly 70% of US economy is in consumption, are released several hours before the Federal Reserve announces its first rate increase after the pandemic. Markets are jumpy, and the release is set to impact expectations.

Traders are interested in what is coming after Wednesday’s 25 bps hike and bond markets are pricing such a hike in every single meeting the Fed has in 2022. A robust data point may increase such estimates, or push investors to expect a faster pace of increases. That would push the dollar higher.

However, while the labour market is booming and inflation is steaming hot, Russia’s war in Ukraine continues raging, and that implies the highest level of uncertainty about the future. Will the global economy falter due to hostilities and sanctions? Or will it end soon, trigger rapid rebuilding and even higher inflation?

These are questions that nobody has answers to, including Federal Reserve Chair Jerome Powell, nor Russia’s President Vladimir Putin. Therefore, the Fed will likely be “humble and nimble” as Powell said, especially non-committal.

There is a good chance the Fed would prefer refraining from bold statements on raising rates, allowing some hot air to come out of the US dollar.

An positive US Retail Sales report is set to temporarily support the dollar, but probably without any follow-through. That is a potential selling opportunity.