EURUSD, H4
U.S. August retail sales fell 0.3%, while ex-autos slid 0.1%. The unchanged reading in July was bumped up to 0.1% but June’s 0.8% was nudged down to 0.7%, for a wash. The 0.3% drop for the July ex-auto figure was revised lower to -0.4%, the 0.9% June figure revised to 0.8%. Sales excluding autos, gas, and building materials was flat from -0.1%. Motor vehicles and parts sales declined 0.9% after a 1.7% July jump (revised from 1.1%). Gas station sales fell 0.8%. Building materials dropped 1.4%, while furniture declined 0.7%. Miscellaneous sales crashed 2.4%. Health and personal care dipped 0.1%. Sporting goods slid another 1.4%. Non-store retailers saw a 0.3% slide. Electronics inched up 0.1%.
Today’s U.S. sentiment reports were weaker than expected, thanks to component weakness underlying the divergent headline moves. We saw a Philly Fed pop to a 19-month high of 12.8 in September from 2.0 in August and -2.9 in July that left a big rise from the 3-year low of -10.2 last December. Yet, component weakness after an already-weak August performance left an ISM-adjusted drop to 44.9 from 47.2 in August and 51.3 in July, hence leaving only a modest rise from the 44.1 expansion-low in April. The Empire State headline rose to -1.99 after falling to -4.21 in August from 0.55 in July and 6.01 in June, but the component data for that report were also weak, and the ISM-adjusted measure fell to an 8-month low of 45.1 from 50.2 in August, 48.8 in July and 50.0 in June. We saw expansion-lows in January of -19.37 for the headline and 43.4 for the ISM-adjusted measure. For later month-surveys, we expect a Richmond Fed rise to -2.0 from -11.0, a Dallas Fed bounce to -2.0 from -6.2, a Chicago PMI rise to 53.5 from 51.4, an ISM rise to 50.0 from 49.4, and an ISM-NMI rise to 53.5 from 51.4, versus a 53.1 two-year low in May. The mix should allow the ISM-adjusted average of the major surveys to fall to the 49 expansion-low seen in January and February and previously in October of 2012, from the 50 average in August, and previously in May and June. We saw a 12-month high of 52 in July that was also seen in March.
Fed funds futures are higher on the back of rather tepid data that further reduced the odds for a Fed tightening next week. The data-dependent FOMC will be hard pressed to make a credible case for a hike given the weakness in August retail sales and industrial production, as well as the poor September sentiment reports (and especially in the component readings) and the subdued inflation readings. With the Fed’s policy decision less than a week away, implied rates are suggesting only about an 18% chance for a rate increase. The probability had risen to over 60% after the hawkish tilt from Fed Chair Yellen and especially VC Fischer back in August at the Jackson Hole central banker meeting, and following a less than dovish ECB stance last Thursday. The recent market volatility can’t give the FOMC much footing either. We’ve thought the December13, 14 FOMC was the better bet all along due to the potential instability from the October 14 money market reform deadline, and the November 8 elections.
EURUSD tracks sideways between 1.1250 – 1.1215, Cable trades both sides of 1.3200 and USDJPY ticks higher to 102.60.
Janne Muta
Chief Market Analyst
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