Dollar Builds Gains after Historic Slump in U.S. Retail Sales and Manufacturing 

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The Dollar built on earlier gains Wednesday after official statistics revealed a historic slump in U.S. retail sales for last month and a further record decline of manufacturing activity in the empire state of New York, bolstering demand for safe-havens as investors contemplate the implications for the global economy.  

Retail sales fell -8.7% on a month-on-month basis in March, the Census Bureau said Wednesday, adding to an earlier -0.5% decline and making for an even worse outcome than was envisaged by an already dour consensus that looked for an -8.0% fall. Almost half the decline was driven by falling car sales. 

Core retail sales, which ignore car sales due to the distorting impact their large price tags have on underlying trends, fell by -4.5% last month. That added to an earlier -0.4% contraction but beat the market consensus which had looked for a -4.9% decline. The core number normally garners more attention from the market because it's thoght to more accurately represent the underlying trend although both series saw historic declines in GDP last month.

"The slump in March retail sales was historic, but not unexpected," says Andrew Grantham, an economist at CIBC Capital Markets. "Stripping out those more volatile elements, sales on the control group (sales excluding autos, gasoline, building materials and restaurants) were actually up 1.7% (against expectations for a similarly sized decline). That reflected stock-piling at food/beverage stores, where sales were up by slightly more than 25% on the month."

Above: Federal Reserve Bank of St Louise graph. Monthly change in U.S. retail sales between 1993 and February 2020.

Grantham says the March data only captures half a month worth of coronavirus containment measures and that as a result, even larger falls are likely when April figures are released next month.

He also says those falls could be augmented even further by a reduction of stockpiling among some retailers, which "won't be repeated in the April."

Retail sales are different to 'consumer spending' and account for around 5.5% of GDP, according to Federal Reserve Bank of St. Louis figures.

Above: Federal Reserve Bank of St Louise graph. U.S. retail sales as a percentage of GDP.

Retail sales falls were accompanied by a more significant decline in the Empire State Manufacturing Index of the Federal Reserve Bank of New York, which fell from -21.5 to -78.2 for the month of April. New York is the epicentre of the American coronavirus epidemic and is a monument to the economic impact of measures taken to contain the pneumonia-inducing disease, which have made a desolate ghost town out of the 'city that never sleeps' this year.

Above: Federal Reserve Bank of New York's Empire State Manufacturing Index. 

The broader measure of industrial production fell by -5.4% at the national level in March, Federal Reserve figures suggested separately. This covers mining and utilities' production as well as output from the manufacturing sector.

However, all of these barometers are widely expected to set new lows in the months ahead in spite of record measures taken by the Fed and government to minimise the virus-related fallout for the economy. 

And the U.S. is not alone as much of the global economy is also on the same path, hence robust market demand for the safe-haven Dollar

Wednesday's data was released amid broad strength in the greenback as well as fresh losses for stock markets and commodities the world over, which has helped to turn the Pound-Dollar rate away from its 200-day moving-average of prices located around 1.2654. The exchange rate fell nearly -1.5% on Wednesday and is in danger of falling further.

"Risk aversion is back with a vengeance this morning and it all started with President Trump’s announcement last night that he would halt funding to the World Health Organization while a review of the group’s coronavirus response is conducted," says Eric Bregar, head of FX strategy at Exchange Bank of Canada. "Sterling/dollar is also looking decidedly negative this morning as today’s broad USD wave pushes prices quickly back below the 1.2560s and the 1.2520s (resistance levels from earlier this week)." 

Above: Pound-Dollar rate shown at daily intervals with Fibonacci retracement of 2020 downtrend marked out.

The Dollar has risen and other currencies fallen amid a deterioration of investor risk appetite that comes after the International Monetary Fund (IMF) forecast a -3% decline in global GDP for 2020 adue to the coronavirus, the weakest performance since 1929. Dire projections came as President Donald Trump suspended funding for the World Health Organization (WHO) in protest over its handling of the initial coronavirus outbreak in China and its related communications with everybody else. 

Forecasts of a global recession would hardly support risk assets and a spat over funding of the WHO might be seen as risking a distraction of policymakers from the containment of the coronavirus, although action against the WHO is something that some analysts see as indicative of other structural reforms that might be found on the path ahead as a result of the pandemic.

"The US's decision to withhold WHO funding and support for other IMF member states may also be giving investors a taste of things to come, with the global economy and its institutions likely to undergo structural changes," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "GBP will remain the FX market's "Brexit currency", which will leave it vulnerable to underperforming its peers during periods of market "risk-off". Our assumption is that the risks of WTO exit from the Brexit transition are rising, so we expect the 1.2650/1.2700 range in the pair to offer good selling opportunities."

Above: Dollar Index shown at daily intervals.