Dollar Losses And Low Stock Volatility May Be Corrected By Retail Sales

How Will The Markets React?

US financial markets were topsy turvy in the final days of trade last week. Both the Treasuries and equities markets held back from big moves, though considerable levels were marked. The dollar, on the other hand, was a different story. On Thursday, the basket-weighted dollar index dropped to a new four-month low without the help of a true market-moving indicator. However, it was Friday’s action that really shook the currency market. Through the Asian and most of the London session, the dollar was put under steady selling pressure that pulled the unit to lows not seen in over two years. In an unexpected twist though, it was quickly bid right back within its battered range on less-than-impressive data. Now, looking ahead to Monday’s economic offerings, a barrage of data will try its hand at putting the US financial markets back on a stable path – whether it will be a trend lower or higher. Of all the indicators on deck, the retail sales report holds the greatest potential for triggering market momentum. According to the official economist consensus, sales activity may have grown 0.6 percent in March, although there are more than a few critics against such an optimistic outcome. Last month marked a sharp correction in equity markets, tightened lending restrictions amid a media frenzy surrounding sub-prime defaults and a steady rise in gasoline prices. Even the related economic indicators for the period raise a few flags of caution. Though non-farm payrolls, a key driver for spending and confidence, put in another steady addition; the optimism wasn’t passed on to the monthly optimism surveys. The Conference Board’s gauge fell to a 4-month low while the University of Michigan report printed a 6-month low. It is difficult to argue for an appetite to spend when the odds are stacked against the consumer. Regardless, given the tout the retail sales gauge has in the fundamental community and the underlying volatility in the markets; big moves may be on the horizon.

Bonds – US 10-Year Treasury Note Futures

The benchmark Treasury note put in for another loss Friday after a second inflation gauge raised expectations of a hawkish turn from the Fed. Now, sitting on support at 107-08 in the active futures contract, the technical setup will converge with the fundamental to produce potentially explosive results. Monday morning’s data will act as the first trigger for a big move. Among the indicators scheduled for release that day are the TICs, Empire Manufacturing Survey, NAHB Housing Market Index and retail sales. Going off of probabilities, the sales report for March will be the heavy-weight number as policy makers and economists take note of the key growth component for the economy. However, even if all of Monday’s data misses its mark, Tuesday’s CPI will be waiting in reserve.

FX – USD/JPY

The US dollar saw a wild day of price action today, especially against the low-yielding Japanese Yen ahead of the release of the G7 communiqué, as the USDJPY pair plunged below 118.50 support before rising above 119.00 once again. Monday could see major volatility once again as any news or commentary from the meeting of G7 Finance Ministers will filter into the markets. Furthermore, the release of advanced retail sales will add to the mix as the figure is anticipated to rebound 0.5 percent in the month of March. While other sectors of the economy may be in the process of slowing, traders will continue to price in a steady hand by the Federal Reserve this year as the US consumer may be as resilient as ever. Such an optimistic result for the retail sector could send USDJPY surging through resistance at the 119.50 level. However, if commentary from the G7 includes warnings on the risks associated with highly leveraged positions, carry trade unwinding could take USDJPY down below 118.00.





Equities – S&P 500 Index

Wall Street managed to post modest gains on Friday, as the S&P 500 closed out the day up 0.63 percent at 1,452.85 led by pharmaceuticals. Merck shares gained 10.25 percent to hit a three year high if $50.21 after the pharmaceutical raised its first-quarter and annual profit forecasts – a move that offset an unfavorable ruling for one its pain reliever drugs. However, the financial sector continued to get hit amidst fears that the problems experienced by subprime lenders would spread to other regions. American Home Mortgage plunged 16.3 percent to $21.63 after the home lender lowered its profit forecast for this year.

Monday could bring about a resurgence in US equity markets, as retail sales are anticipated to rebound 0.5 percent in the month of March. While other sectors of the economy may be in the process of slowing, equity traders' sentiment would get a boost on a strong spending report as the US consumer may be as resilient as ever. As a result, the S&P 500 could target February’s high if 1,461.57.