After the reaction to yesterdays stronger than expected trade report was dampened by the looming FOMC, traders were anxious for the unencumbered retail sales numbers due today. What was expected to be a modest improvement in sales providing fundamental direction for the dollar evolved into a surge in consumer spending that instigated a sharp rally for the currency.
Against the euro, the greenback advance broke a through temporary support at 1.3250 on a 65-point run that moved the floor down to 1.32. For the USDJPY, the 116.70 117.20 range gave way as a steady move since the Asian session pushed spot nearly 90 points to 117.55. A mirror of the euro, the Swiss franc heeded the firm dollar bid that triggered a sudden 55 point rally in the USDCHF exchange to 1.2085. Finally, the GBPUSD once again proved the biggest mover on the news as the pair traded out of its unusually slim 25 point trading band for a healthy 100-point sweep lower to 1.9606.
With worries over the housing market slump and the fresh contractionary dip in the industrial sector dominating economic growth projections, todays retail sales report offers tangible evidence that the economy may bottom out in a soft landing. Leveraged with the statistic that consumer spending makes up nearly two-thirds of GDP, the 1.0 percent rebound in November retail sales handily supports optimism. The months print identified the first increase in sales since July. From the breakdown, it is clear that a generous portion of this unexpected swell in consumer spending was brought on by holiday shopping. This comes from a 4.6 percent increase in electronics purchases, aided by discounts of items like LCD televisions and computers. However, this group was not the only contributor to overall sales. Many of the product groups that had been battered by the steady decline in the housing market and record high energy prices over the recent past were enjoying hearty rebounds in November. Sales of building materials rose 1.8 percent, adding to speculation that the end may be in sight for the deflating bubble. Working off of the stabilization in energy prices, auto sales grew 0.9 percent while gas station receipts jumped 2.3 percent. Now it remains to be seen whether strong employment and wage growth trends will be able to sustain spending when the holiday season passes.
While the retail data was undoubtedly the headline grabbing indicator this morning, there were a few less prominent reports that should be noted. October business inventories met expectations of a 0.4 percent rise, making for the 15th consecutive increase. Specifically important for this measurement is the inventory/sales ratio which reached its highest level since February of 2005. This will be monitored to see if the there is an improvement in conjunction with the resurgence in retail sales for November. Elsewhere, the weekly MBA mortgage applications gauge measured an 11.4 percent jump in filings through the week ending on December 8th. This was the biggest increase in 10 weeks and the highest overall level of filings since October of last year. With the second biggest increase in purchases over the same period, the short-term release projects a strong December for the housing market with prices contracting and mortgage rates well off of highs. Turning to the coming days, traders will now feel out inflation for spot guidance. Thursday holds Novembers import index as the first price gauge in the governments trio of inflation reads. However, the event risk associated with this sole indicator pales in comparison to Friday which finds CPI, manufacturing and trade reports ready for digestion.
The benchmark equity indices were little changed by mid-day trade, though the strong retails sales number provided a noticeable bid on the open. The S&P 500 led the pack by 16:45 with a 0.19 percent climb to 1,414.20. The Dow was ahead 0.1 percent to 12,328.24 while the NASDAQ Composite rose 0.02 percent to 2,432.03 by the same time. Leading the airline sector higher, rumored discussion of a possible merger between Continental Airlines and United Airlines laid the foundation for a possible consolidation trend throughout the industry. Shares of United surged $2.33 on a 5.4 percent run to $45.56 while those of Continental rallied 4.3 percent or $1.84 for $44.62. Elsewhere, a memo from Hilton Hotels Corp. confirmed the companies initial 2007 growth forecasts. Shares of the hotel franchiser grew 2 percent on the news to $34.23.
Similar to the currency market, treasury yields soared after the strong spending indicator this morning, as speculation of a rate hike in the first quarter was heavily pared. Ten-year notes slipped 20/32nds to 97-08 with yields up 8 basis points to 4.563 by 16:35 GMT. T-bonds were 1-1/32nds lower at 97-08 as yields rose 7 basis points to 4.672.
