Forex Investment and Currency Trading

Retail sales disappointed in April, falling 0.4% m/m (consensus: 0.0). The breakdown of the retail sales report was particularly surprising. Auto sales actually inched up by 0.2% despite the plunge in unit new vehicle sales in April. This could be attributed in part to an increase in used vehicle sales and price effects. Retail sales ex-autos fell 0.5% m/m versus forecast for a 0.4% rise. Similarly, “core” retail sales, which nets out autos, building materials, and gasoline sales, unexpectedly declined 0.3%. This follows on a 1.0% slide in March, leaving core retail sales down a record 2.2% y/y (data only go back to 1992). Among the components, there was a broad-based decrease in discretionary spending. Sales at electronic stores fell 2.8%, clothing dropped 0.5%, and department stores fell 0.2%. The most resilient has been sales at health and personal care stores, which increased 0.4% in April and is up 4% y/y.

Weak retail sales in April kicks Q2 off to feeble start. Assuming sales improve slightly over the next two months of the quarter, analysts expect real consumption to be unchanged in Q2. Consumer spending also looks likely to be revised lower in Q1 to show a 1.9% rise versus the previously reported 2.2% increase. After taking into account the positive news from trade and inventories, it now looks like Q1 GDP growth will be revised to -5.5% from the advance estimate of -6.1%.

Market expects a weak trajectory for consumer spending. Although consumers will receive a near-term boost to real disposable income from tax cuts and transfer receipts, it will be transitory. Consumers will continue to struggle with the lagged effects of a weak labor market and massive wealth destruction, which should restrain spending and encourage savings.

US Treasury Secretary Geithner spoke on initiatives to help small businesses

Treasury Secretary Geithner announced a new imitative to support small businesses. The Treasury will re-open the application window for small banks (less than $500mn) under the Capital Purchase Program. In addition, the risk-weighted asset cap will be raised to 5% from 3% and the deadline for small businesses to form a holding company will be extended to six months. The government has already put in place two other programs to help small businesses. The Recovery and Reinvestment Act increased loan guarantees and temporarily eliminated fees on SBA lending. The government has also allocated $15bn for direct purchases of SBA loans in an effort to restart the secondary lending market.

More broadly, Secretary Geithner said the Treasury is working on new rules and regulations to deal with systemic risk problems. He referenced a proposal that would be kept strictly separate from the existing FDIC deposit insurance fund, limiting the extent to which community banks and tax payers bear the burden from failures of large financial institutions.