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USD: Retail Sales, PPI and Fed Comments

Last updated 11/15/2011 9:06 AM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

This morning's U.S. economic reports were better than expected, but the impact on the dollar was nominal because investors are still focused on Europe and the upside surprises in U.S. data were not enough to convince them that the Federal Reserve will abandon its plans to change monetary policy next month. Retail sales rose 0.5 percent in October, compared a forecast for 0.3 percent growth. Consumption of items excluding autos and gas rose 0.7 percent, more than 3 times the market's forecast. However the problem is that spending grew at a slower pace in September than October. This can be partially blamed on lower gas prices but with the unemployment rate at 9 percent, the lack of job growth and the overall weakness of the U.S. economy is the main reason why consumers are not spending. Unfortunately the depressing conditions in the economy will not improve anytime soon which means the outlook for consumption remains grim. Although GDP growth is expected to be supported by spending in the third quarter, consumption in the fourth quarter has started on soft footing and unless this holiday shopping season is a strong one, retail sales is on track to weigh on GDP growth in Q4. 

Manufacturing activity in the NY region also turned positive after five months of contraction. The Empire State manufacturing index rose to 0.61 in November from -8.48 in October, the highest level since May. According to the report, the increase was driven by higher shipments, average workweek and a brighter outlook for manufacturing activity six months forward. Unlike other parts of the world, there are signs of life in the U.S. manufacturing sector but before getting too excited, it is important to remember that the NY region represents a small portion of the nation's overall manufacturing activities and the index can be volatile. We need to see similar improves in the Philadelphia and Chicago regions before we can declare that American factories are leading the recovery.

One argument for more stimulus is lower inflation - producer prices fell 0.3 percent in October with PPI ex food and energy cost remaining unchanged last month. On an annualized basis, this drove PPI growth down to 5.9 from 6.9 percent. This was the largest decline in four months and a direct result of lower commodity prices. The month of October was a period of lower inflationary pressures for not just the U.S. but many countries around the world and this is good news if central banks are looking to support growth through easier monetary policy. 

Fed Officials Call for More Stimulus

Based on this morning's comments from Federal Reserve officials, the idea of more stimulus is gaining traction within the central bank. For example, Fed President Evans, who is a voting member of the FOMC, called for "increasing amounts of policy accommodation" because inflation has been relatively tame and unemployment is too high. Although he admits that his view is unusual for the Fed, he feels that the central bank should be acting as if there's a very big problem. Evans supports the notion of an inflation target and believes that it should be between 2 and 3 percent. Fed President Bullard is not as pessimistic as Evans but he too believes that more can be done. Options include large scale asset purchases and reopening liquidity facilities if Europe's troubles worsen. He also supports the idea of changing the central bank's communication tools but he believes that tying policy to the unemployment rate could be a disaster. Bullard's views are important and in line with some other comments from U.S. policymakers, but he is not a voting member of the FOMC this year which means that he can only provide recommendations to the monetary policy committee.

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Comments (1)

moonie

November 15, 2011 at 11:45 AM ET

I always enjoy your insight.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.