Advance Retail Sales (DEC) (13:30 GMT; 08:30 EST)
Expected: 0.0%
Previous: 1.2%

Retail Sales Ex Autos (DEC) (13:30 GMT; 08:30 EST)
Expected: -0.1%
Previous: 1.8%

What Are The Markets Facing?

US economic data is expected to show that Advance Retail Sales were lackluster during December, despite heavy discounting and promotions for the holiday shopping season. The retail sales index is estimated to go unchanged during the month after surging 1.2 percent in November, as consumer confidence rapidly deteriorates and energy prices skyrocket. Indeed, consumer sentiment reports issued by the University of Michigan and ABC both showed their indexes plunging to two year lows during the month of December on a gloomy combination of jittery financial markets, a collapsing housing sector, and oil rocketing to record highs near $100/bbl (crude hit the all-time high of $100.09 on January 3). Retailing giants like Wal-Mart, Macy’s and Gap some of the worst sales readings in over four years, leading some companies, including Kohl’s, to slash Q4 earnings forecasts. There is little doubt that retailers are contending with difficult circumstances as they are forced to offer the biggest discounts possible in order to draw customers, which will negatively impact profit margins. Overall, there is potential for the Advance Retail Sales index to fall more than expected given the sour spending environment. On the other hand, a strong December retail sales report could ignite a bid for the greenback and the Dow on Tuesday, though it may be brief as traders grapple with the implications of Federal Reserve Chairman Ben Bernanke’s ultra-dovish commentary from last week, as fed fund futures are fully pricing in a 50bp cut on January 30 and a 34 percent chance of a 75bp cut.

Bonds – 10-Year Treasury Note Futures

Treasuries continue to look bullish as they near the 115-24 high, though overbought daily oscillators suggest further gains may not be very aggressive. From a fundamental perspective, Treasuries could be weighed down towards support at 114-24 on Monday as futures expectations for a 75bp cut by the Fed on January 30 may be a bit overdone. However, Tuesday’s release of US retail sales may boost the contract once again as they are expected to fall flat in December on lackluster holiday spending, which will raise speculation that the economy is already in a consumer and housing-led recession that only needs to be confirmed by GDP figures.

FX – EUR/USD

The EUR/USD break above 1.4820 is a bullish sign of things to come for the pair, as there is little to stand in the way of a push to record highs above 1.50 in the near-term. The gains for the pair (and losses for the US Dollar) came as Federal Reserve Chairman Ben Bernanke issued extremely dovish commentary last week, which led traders to aggressively ramp up expectations for a January rate cut of up to 75bp. Similar to Treasuries, EUR/USD could be weighed down on Monday to consolidate gains in the 1.4820 – 1.4920 region as these rate cut expectations may be a bit overdone. However, Tuesday’s US Advance Retail Sales report could lead the pair higher, especially if the figures are disappointing and spark more pessimistic sentiment on the markets, as analysts judge that the US economy may already be in recession.

Equities – Dow Jones Industrial Average

The daily charts of the Dow Jones Industrial Average look highly bearish, especially after the index plunged through the psychologically important 13,000 level. Where the Dow goes from here will depend primarily on the status of risk aversion in the markets as well as financial market news, but it is worth noting that immediate support looms below at 12,518 and that sharp drops in the Dow tend to be followed by brief periods of consolidation. With no economic data scheduled for release on Monday, this may be the ideal time for this occur. On Tuesday, though, US Advance Retail Sales could weigh on the US equity markets, especially if traders continue to bet that the Federal Reserve will cut rates by at least 50bp at the end of the month, if not by 75bp.
Terri Belkas is a Currency Strategist at FXCM.