US markets still at risk with upcoming retail sales

Global markets are looking slightly more upbeat and seem to be attempting a recovery from the previous day’s aggressive sell-off in bonds. This could change suddenly though, mainly because I see risks to the US markets later today with the US advance retail sales data being high-risk and both GDP and interest rate expectations being at stake. This hasn’t been documented too much because most focus on US labour data, but retail sales have been unexpectedly soft for too long and we are yet to notice any reasonable correlation between substantial job creation and improved consumer confidence transitioning into consumer spending.

If the retail sales data continues to disappoint, I would not be surprised for GDP expectations to be at risk to further downside revisions and pressure for the Federal Reserve to begin raising interest rates to ease as well. The US indices are at risk of declines, mainly because optimism over how the US economy has performed over the previous year has been a bit over-hyped. While there has been substantial and consistent progress with job creation, there is still room for far more improvement in other sectors of the US economy and consumer spending is certainly one of these areas.

Aside from the risks ahead for US markets, European indices are looking more positive after the GDP announcements this morning. While the German DAX has been vulnerable to softness after its GDP missed expectations, I am expecting the DAX to recover any losses after its inflation data came in stronger than forecasted. At the end of the day, Germany is going to benefit from the weaker Euro enhancing export competitiveness and its economy is probably going to continue growing robustly throughout the remainder of the year. The main threat for the EU economy is dangerously low inflation, and signs that it is picking up will improve optimism around Europe. There has also been an unexpected upside surprise with the French GDP figures, which has resulted in an upward bounce for the CAC 40 Index and will hopefully lead to optimism that the French economy is starting to progress after previously being seen as one of the struggling ones within Europe.

The Shanghai Composite is performing around 0.5% lower after its overnight economic data continued the reoccurring theme that slowing domestic momentum is behind the reduced domestic growth. Both Industrial Production and Retail Sales missed expectations and although these were only slight misses, it continued to point out that the China economy is slowing down. The People’s Bank of China (PBoC) has been increasingly active when it comes to attempting to reinvigorate economic growth over the previous six months, but the pressure is continuous because we have already slipped to the lower range of the 7% government target. Each piece of economic data from China will remain under close watch, and the expectations will be intense on the PBoC to continue acting if we appear in jeopardy of dropping below the 7% target. I am expecting the PBoC to act aggressively when it comes to the 7% GDP target and stimulus measures will intensify at a rapid rate if we appear to be at risk of slipping below the lower range.


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