Retail Sales Will Set the Beat for Markets
USD is directionless just above last week’s cyclical lows. Today, the US February retail sales data (12:30pm London) will set the tone for USD this week. A weaker than expected print will add to US growth concerns and weigh on USD. In contrast, solid retail sales growth will calm fears about fading consumer spending activity and offer USD near-term support.
US retail sales is expected to recover after being negatively affected by the cold weather in January. Consensus sees headline at 0.6% m/m vs. -0.9% in January. More importantly, the retail sales control group used for GDP calculations and which excludes volatile items like car sales, is projected at 0.3% m/m vs. -0.8% in January.
Worsening consumer confidence points to downside risk to retail sales. The March University of Michigan preliminary headline consumer sentiment index plunged to the lowest since November 2022 while the expectations index dropped to the lowest since July 2022. The details also showed worsening job security which could restrain household spending intentions.
The Atlanta Fed's GDPNow model will be updated later today. The model currently estimates Q1 at -2.4% SAAR but adjusted for the unusual surge in nonmonetary gold imports, the model would be tracking growth at 0.4% SAAR. The New York Fed's Nowcast model is more favorable and tracking Q1 growth at 2.69% SAAR as of March 14 vs. 2.67% on March 7.
AUSTRALIA
AUD/USD is firmer above 0.6300. Australia’s Treasurer Jim Chalmers warned that Cyclone Alfred is estimated to reduce Q1 GDP by -0.25pts and lead to upward pressure on inflation. The RBA will look through this temporary negative supply shock. The RBA signaled it will pay particular attention to labor market development to guide future policy decision. Australia’s labor market report is due Wednesday. In the meantime, cash rate futures continue to imply almost 75bps of easing in the next twelve months with the next 25bps cut fully priced-in for July.
CHINA
CNH and the CSI 300 stock index largely ignored China’s better-than-anticipated January-February economic data. Industrial production rose 5.9% y/y (consensus: 5.3%) vs. 6.2% in December, retail sales increased 4% y/y (consensus: 3.8%) vs. 3.7% in December, and fixed asset investment improved by 4.1% y/y (consensus: 3.2%) vs. 3.2% in December.
Meanwhile, China unveiled on Sunday a “Special Action Plan to Boost Consumption” by raising incomes, stabilizing the housing and stock markets, and improving medical and pension services. We’ve seen this time and time again. In fact, rebalancing the economy away from investment toward domestic consumption has been an explicit goal of China since the December 2004 Central Economic Work Conference. However, three major structural constraints prevent any meaningful effort to boost the role consumption plays in the economy:
i) Low household income levels. China household income accounts for 61% of GDP while in the West households retain a larger share of what they produce, typically 70-80% of GDP. China’s investment-driven growth model means that local governments capture a significant portion of economic output due to their control of land sales and infrastructure investment.
ii) High precautionary savings. China households save a significant portion of their income (over 30% of GDP) due in part to weak social safety nets, falling job security, and an aging population. Moreover, wealth is concentrated among higher-income groups who tend to save more rather than spend.
iii) High levels of household debt. China household debt is quite large relative to household income at 145%. For comparison, US household liabilities to disposable income totaled 95% in Q4 2024.
