• A weak Retail Sales report questions the recovery
  • Lower import prices, disinflation on the way?
  • Waiting on consumer inflation data

The US dollar took an unexpected hit yesterday after the release of weak Retail Sales data and lower import prices.

The retail sales declined by 0.9 percent in December compared to November, and this month-over-month drop was the largest decline since January 2014. With a recent plunge in oil prices, a 6.5 percent decline in gas stations sales was expected.  However, the market was surprised to learn that the sales decline was broad-based and covered many key spending categories. This suggests that perhaps consumers are not spending their windfall savings from lower oil prices.

The US economy is mostly driven by consumer spending. Therefore, a slowdown in retail sales, particularly over the holidays, is disconcerting. If consumers continue to hold back their spending in the coming months then the economy risks falling into another year of subdued growth and no wage gains.

Further darkening this prospect, December import prices fell by 2.5 percent, which was the largest drop since December 2008.  A stronger dollar and falling oil prices are largely responsible for this decline. When lower import prices persist, general prices tend to fall because domestic producers are forced to lower their prices to protect their market share and thereby potentially usher in disinflation.

In summary, the prospect of subdued growth, no wage gains and disinflation are not good for the dollar and as a consequence, the dollar stumbled yesterday.  But, one month’s data does not establish a trend.  The market will be paying close attention to additional incoming data to discern if the economy can free itself from this gloomy prospect. This starts with this Friday’s release of December Consumer Price Index report – and there is much more to come.

EUR-USD gained yesterday but plunged this morning when the Swiss National Bank surprised the market and let the CHF float in the market instead of holding its promised EUR-CHF peg at 1.2000. It is too early to assess the full outcome of this surprise but stayed tuned.

GBP-USD climbed higher as the dollar took a hit from a weak retail sales data and falling import prices (as discussed).  Some analysts now suspect that the timing of the Bank of England’s rate increase will not be too far behind the Fed’s move.

USD-JPY plunged yesterday, defying many forecasts which called for the USD-JPY to break a 1.20 level this week. A surprising gain in oil prices and a prospect of lower US rates made the yen more attractive to international investors who were seeking a safe haven currency.

Have a great day.