US Retail Sales Preview: Positive surprises eyed for dollar bulls to regain poise

• The Retail Sales Control Group is foreseen at 0.3% in September after the previous miss.
• Core Retail Sales are set to drop by 0.1%, as high inflation digs a hole in consumers’ pockets.
• Only upside surprises in the headline and Core figures could revive the US dollar uptrend.

Amidst the continued drop in gasoline prices, easing inflation expectations and improvement in American consumers’ confidence, yet another rise in US Retail Sales may not come as a surprise for the month of September. The more precise gauge, the Control Group is expected to show an increase, which could have a significant impact on the US dollar trades. The US Census Bureau will publish the data on October 14 at 12:30 GMT.

The US consumer spending, as represented by Retail Sales, is expected to rise by 0.2% MoM in September after recording an unexpected increase of 0.3% in August. The July Retail Volume was revised lower to a 0.4% decline.

Meanwhile, the Retail Sales Control Group (ex-food services, autos, gas, building materials) for September is seen higher at 0.3% versus August’s 0%. The core Retail Sales (ex-Autos) are likely to decline by 0.1% MoM in the reported month vs. -0.3% reported previously. Note that the figures aren’t adjusted for inflation.

In August, American shoppers showed resilience despite a four-decade high inflation rate, as a majority of retail categories grew last month, as cheaper fuel prices allowed Americans to spend on food, motor vehicles and other discretionary purchases such as building materials and garden equipment.

Trading the US dollar with Retail Sales

A below-forecast reading for the Control Group cannot be ruled out after the previous miss. The headline print, however, could grab more attention again if it surprises the upside this time as well. For the US dollar to regain the upside traction, the Core figures also need to show an unexpected increase. The data is unadjusted for inflation and, therefore, only the above estimates readings would represent real growth in sales.

If the Core Retail Sales print below estimates or even matches the forecasts, it could imply that consumers are feeling the pinch of widespread inflation notwithstanding some relief from falling prices at the gas station. It could weigh on the dollar temporarily, as expectations of steeper Fed rate hikes to tame inflation will overpower and keep the dollar bulls afloat.  

It’s worth noting that the US dollar’s reaction to the Retail Sales release could be influenced by the persisting risk trend and Fed rate hike expectations, as the data succeeds the all-important Consumer Price Index (CPI) release due on Thursday.

The US inflation is the most critical gauge and will determine the size of the November Fed rate hike, especially after Wednesday’s FOMC minutes. The minutes showed that the Fed members “expect higher borrowing costs to slow economic activity by curbing spending, hiring and investment, which should weaken inflation pressures.” At the moment, markets are pricing an 81% probability of a 75 bps Fed rate rise next month.

To conclude, Friday’s US Retail Sales and University of Michigan (UoM) Consumer Sentiment data will be also closely scrutinized, as they will shed additional light on household trends amid rising interest rates and the ongoing cost of living squeeze.