With the U.S. economy in the 10th year of a record long expansion and unemployment at a half-century low, most traders assumed 2019’s critical holiday shopping season would mark another record, and based on the initial estimates and survey-based measures of spending, it may well have done so.
That said, there are still some reasons for caution ahead of the release of tomorrow’s December retail sales report. For one, the Thanksgiving holiday fell far later in the year than usual, condensing the typical holiday shopping season from five weeks to just four.
Then, there was this morning’s earnings report from big box retailer Target (TGT). The company reported that same store sales rose just 1.4% year-over-year in the key November-December period; well below analyst estimates of a 3.8% rise. Sales of generally popular electronics (-6% year-over-year) and toys (0%) were cited as specific areas of weakness, driving the stock down 7% as of this writing (see chart).
Of course, investors fear that Target’s disappointing quarter is just the proverbial canary in the coal mine for broader holiday retail sales, so it’s no surprise that rival Wal-Mart (WMT) is trading off by -1% and the overall retail sector as represented by the SPDR S&P Retail ETF (XRT) is also ticking lower, despite a general rise in the broader indexes Wednesday.
Regardless of which market you trade, today’s U.S. December retail sales report will be critical. Economists are looking for a 0.3% increase, with ex-auto retail sales expected to rise at a more robust 0.5%. That said, if Target’s miss yesterday is any indication, there could be potential for a below-expectation reading, which could drive the retail sector, the broader stock market, and even the U.S. dollar lower in tomorrow’s U.S. session.
USD/CNH: Waving the All-Clear Flag?
From a geopolitical perspective, this week’s biggest event is the planned signing of the “Phase One” trade deal between the United States and China, scheduled for Wednesday.
The market has cheered the recent progress toward an initial deal, especially as it deterred further tariffs between the two countries, but readers would be wise to remember that most of the imposed tariffs remain in place. And, as Bloomberg reported om Wednesday, those tariffs are likely to stay in place until after the U.S. presidential election in November as the United States evaluates China’s compliance with the agreement. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steve Mnuchin made this explicit, noting that “[t]here are no other oral or written agreements between the U.S. and China on these matters, and there is no agreement for future reduction in tariffs.”
In other words, trade policy is still a “brake” on global growth, albeit one that is no longer being pressed as hard.
The headlines reminded traders how far apart the United States and China are from a comprehensive agreement, erasing the morning gains in U.S. stock indices. In the FX market, the U.S. dollar-Chinese yuan (USD/CNH) exchange rate has been a key barometer of health of the U.S.-China relationship, and it recently fell to its lowest level since mid-July, signaling general optimism (see chart).
While interest rates are ticking higher after today’s headlines, the pair remains in a textbook downtrend, with a clear string of lower lows and lower highs since the early September peak near 7.20.
Therefore, if we see a “buy the rumor, sell the fact” trade in the yuan on the signing of the trade deal, traders may favor selling bounces back toward the key 6.95 level later this week. Alternatively, a move all the way back above 7.00 would suggest that the situation is re-escalating and shift the bias in favor of the bulls.
Hear what Matt Well had to say about Geopolitics, Economics and the Forex Markets at the recent Las Vegas TradersExpo. Matt Weller | Global Head of Market Research | GAIN Capital mweller@gaincapital.com | w: www.forex.com & www.cityindex.co.uk
