Strong US Retail Sales; Should the Fed Consider it Transitory?

With easy monetary policy and more money from the government, US consumers are borrowing at low interest rates and spending stimulus checks

US Retail sales for June were strong. The headline print was +0.6% vs -0.4% expected. May’s print was revised from -1.3% to -1.7%. In addition, Retail Sales ex-Autos was +1.3% vs +0.4% expected. May’s print was revised from -0.7% to -0.9%. Although the revisions for May were to the downside, June’s data more than makes up for them.

What are economic indicators?

“Don’t underestimate the American consumer” is a phase often thrown around Wall Street. When the economy is in trouble, the consumer seems to have learned a valuable lesson from the both monetary and fiscal policies: SPEND! With easy monetary policy and more money from the government, US consumers are borrowing at low interest rates and spending stimulus checks. Now, as of July 15th, many Americans will also have monthly child tax credit checks until the end of the year. This should help keep retail sales elevated. Fed Chairman Powell said in his semi-annual testimony before Congress that “substantial further progress” is a way off. As the Fed has already determined that most of the current inflation is transitory, traders will have to consider if the Fed will also consider strong retail sales to be transitory. After all, in addition to supply chain issues, more spending leads to higher prices. If the strong June retail sales print turns into a trend, the Fed will have more questions about what is transitory and what isn’t!

Although yesterday we discussed how this weeks data has led to trading ranges in the DXY and EUR/USD, some USD/CAD is making further gains. Despite another round of tapering on Wednesday, USD/CAD has broken out of it symmetrical triangle and Is moving higher. As crude oil moves lower (which, by the way, also could lead to an increase in retail sales), the Canadian Dollar will get weaker and the US Dollar will get stronger. Crude Oil is currently -1.5% today. Resistance in USD/CAD crosses at the April 21st highs of 1.2654 and then the 161.8% Fibonacci retracement level from the July 8th highs to the July 14th lows, near 1.2700. Short-term horizontal support is at 1.2539, just ahead of the downward sloping trendline of the triangle near 1.2500. Note however that as price tries to put in new highs, the RSI is moving lower, causing a divergence between the two.

Source: Tradingview, FOREX.com

US consumers spend. This is shown through the current strength of the June Retail Sales print. However, stronger spending is a result of low interest rates and free money (stimulus checks). If strong retail sales trends for a few months, the Fed will have to determine if they should consider this to be transitory as well!