Advance Retail Sales (SEP) (12:30 GMT, 08:30 ET)
Expected: 0.2%
Previous: 0.3%

Retail Sales Ex Autos (SEP) (12:30 GMT, 08:30 ET)
Expected: 0.3%
Previous: -0.4%

How Will The Markets React?

The release of US retail sales for the month of September could prove to be a big market-mover on Friday, as fixed income, forex, and equity traders will be looking to gauge the status of the American consumer. Headline retail sales growth is estimated to slow to 0.2 percent from the month prior, which will likely prove to be weighed down by vehicle purchases, as Ford reported a 14 percent drop in sales during September from a year prior, while even Toyota saw sales fall back nearly 3 percent during that same period. Excluding autos, retail sales are expected to bounce back and improve 0.3 percent after dipping 0.4 percent the month prior. However, there is a risk that apparel sales could also lead declines as companies including JC Penney and Nordstrom cut third quarter profit estimates. Meanwhile, Wal-Mart and Target both reported weaker-than-expected same-store sales during the third quarter. Clearly, there are major downside risks to Friday’s spending figures, and surprisingly soft figures could stir speculation that the prospects for a contraction in consumption growth will force the Federal Reserve to cut rates again on October 31. Currently, Fed Fund futures are pricing in a 40 percent chance of a 25 basis point cut at the end of October, down from 88 percent two weeks ago but up from 38 percent just yesterday. As a result, if the news proves to be surprisingly weak, US markets may ramp up speculation of a cut to 4.50 percent, which could send Treasuries and EUR/USD higher.

Bonds – 10-Year Treasury Note Futures

Treasury note futures continued to push down to test the recent lows and trendline support at the 108-12 level, as traders cut down their expectations for a rate cut on October 31. While the previously mentioned support level could block sharp moves down towards the 200 SMA at 107-25, the release of US retail sales provides substantial event risk, as surprisingly strong gains are likely to fuel sell-offs in Treasuries. However, if the data proves to be especially disappointing, the news could be just the impetus to send the contracts surging from trendline support.

FX – EUR/USD

The EUR/USD pair has recovered quite a bit on Thursday to test the October 2 highs of 1.4238, despite the release of fairly strong import price growth. This signals that broader inflation pressures may be picking up, which could lead the Fed to leave rates unchanged on October 31. However, later in the trading session, a sharp pullback in US equities took EUR/JPY for a tumble and added selling pressure to EUR/USD. Friday’s release of US retail sales could stoke some volatility in the EUR/USD pair, as traders will be anxious to gauge the health of the American consumer. If the data signals that consumption is lackluster, the markets will judge that the Federal Reserve has no choice but to cut rates at the end of the month, leaving potential for EUR/USD to push through near-term resistance to take on the record highs at 1.4282. On the other hand, a surprisingly strong spending report could weigh the pair down towards trendline support.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average continues to hold within tight ranges, with the daily charts showing an ascending channel formation. As long as price holds above 14,000, it appears that bullish sentiment in the equity markets will continue to prevail regardless of the fundamentals, though the Dow has shown some hesitance to push above 14,200. However, equities face notable event risk amidst Q3 earnings announcements and Friday’s US retail sales report. If retail sales prove to be stronger than expected, US equities could gain somewhat, led by retailer shares. However, if the data proves to be especially disappointing, the Dow could still rally as traders may judge that the news will force the Federal Reserve to cut rates on October 31. The fact is, investors have generally been impervious to the fundamentals at hand and, instead, have opted to ride the recent wave of optimism that may take more than a bit of soft retail sales reports to derail.

Terri Belkas is a Currency Strategist at FXCM.