Retail Sales Slowdown and Political Risks Impacting USD and EUR Markets

USD: Retail Sales Signal Growing Economic Concerns

Yesterday, the US stock market hit a new record high, largely thanks to tech giant Nvidia becoming the world's largest company by market cap. This highlights the pivotal role of technology in the US market. However, despite this high point, recent retail sales data suggest that the US economy may be slowing down, with signs that consumers are starting to cut back on spending. (Sourced from LINK).

SP500 Daily Chart 

 Source: Finlogix Charts Retail sales for May were lower than expected, and April's figures were also revised downwards. March's data faced similar revisions, showing a clear trend of stagnant consumer spending. Excluding autos and gasoline, retail sales have dropped by 0.2% since the beginning of the year. This decline, along with slowing wage growth, a softening job market, and falling consumer confidence (as reported by the University of Michigan), points to a longer period of weak consumer spending. (Sourced from LINK).

Retail Sales 

 Source: Finlogix Economic CalemdarThis slowdown is critical for the Federal Reserve's policy decisions. Several Fed officials spoke yesterday, stressing that future rate cuts will depend on new economic data. 

Fed Governor Kugler hinted at a possible rate cut later this year, while St. Louis Fed President Musalem suggested it might take several quarters for the data to support such a move. Other officials, including Presidents Williams, Barkin, and Collins, also spoke, with fewer remarks about the need for more rate hikes.

Expectations for rate cuts have increased, with 45 basis points of cuts anticipated this year and 140 basis points by the end of 2025. This is the highest level of expected easing since March, which could weaken the US dollar. The lack of growth in retail sales so far this year, combined with easing inflation, suggests that a clear slowdown in job growth in the Non-Farm Payrolls (NFP) report could lead the Fed to rethink its stance, raising speculation of a possible rate cut in September.

18 Sep24 CME FED Watch Tool 25bps Expected 

 Source: CME FedWatch 18 Dec24 CME FED Watch Tool 25bps Expected 

 Source: CME FedWatchEUR: Political Risks Amid Economic Stability

Political risks in Europe are currently holding back the euro, preventing it from rebounding more strongly against the USD despite weaker US retail sales data. However, the euro has found some stability, helped by reduced investor fears over the rise of the Rassemblement National (RN) in France. Since President Macron's snap election, a 1% risk premium is estimated to be priced into the euro, a small move compared to the more volatile bond spreads. (Here is the video where I explain all of what is happening over in France LINK).

Recent actions indicate stability, especially after Marine Le Pen's comments about respecting institutions and working with President Macron, which have eased immediate concerns. The limited reaction in FX markets contrasts with the more significant bond spread moves, suggesting that the reappraisal is more about fixed income risks tied to RN and far-left alliance fiscal policies than existential threats to the eurozone.

The eurozone is in a much stronger position today than during the 2010-12 crisis. Sovereign yield spreads for Greece, Portugal, and Ireland are significantly narrower, reflecting improved economic conditions. The European Central Bank (ECB) now has the Transmission Protection Instrument (TPI) to manage disorderly yield moves, further stabilizing the region.

There are signs that RN might be moderating some of its policies, with recent changes on its website suggesting a softer stance on defence and relations with Russia. RN leader Jordan Bardella has proposed waiting until the end of the Ukraine conflict before making decisions on NATO membership. This moderation aligns with a correlation between growing support for RN and a softening of its extreme policies regarding EU membership.

Current market stability is partly due to expectations of a hung parliament, which would limit RN's influence. However, if RN performs better than expected in the upcoming elections, political risk premiums could rise, potentially pushing EUR/USD below the 1.0500 level. Upcoming US jobs reports will also be crucial, as weaker data could support the euro.

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