Advance Retail Sales (FEB) (12:30 GMT; 08:30 EST)
Expected: 0.2%
Previous: 0.3%

Retail Sales Ex Autos (FEB) (12:30 GMT; 08:30 EST)
Expected: 0.2%
Previous: 0.3%

What Are The Markets Facing?

US economic data is expected to show that Advance Retail Sales slowed during February to a 0.2 percent pace, as consumer confidence rapidly deteriorates and energy prices skyrocket. Indeed, during the month of February, the University of Michigan consumer confidence survey plunged to a 17-year low of 70.8 from 78.4 while the Conference Board’s measure dipped down to a 5-year low of 75.0 from 87.3 on a gloomy combination of jittery financial markets, a collapsing housing sector, and oil rocketing to record highs above $100/bbl. 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. Furthermore, labor market conditions are deteriorating rapidly, as non-farm payrolls fell negative for the second consecutive month by 63,000, marking the sharpest loss in five years. Overall, there is potential for the Advance Retail Sales index to fall more than expected given the sour spending environment. However, February retail sales could be a bit stronger than expected, though any gains may only be the result of sales at fuel stations, as average gas prices rose above $3/gallon. The news could ignite a bid for the greenback and the Dow on Thursday, though it may be brief as traders grapple with the implications of a pronounced credit crunch and high probability of recession, as fed fund futures are fully pricing in a 50bp cut on March 18 and a 70 percent chance of a 75bp cut.

Bonds – 10-Year Treasury Note Futures

Treasuries continue to look bullish as they near the psychologically important 120-00 level, and Thursday’s release of US retail sales may boost the contract once again as they are expected to slow amidst dismal consumer sentiment and rising energy prices, 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. However, the gains in Treasuries are looking stretched, and a surprisingly strong retail sales report could weigh the contract back down towards 119.

FX – EUR/USD

The EUR/USD pair continues to rally to fresh highs as ECB President Trichet’s commentary that the Bank is "concerned about excessive exchange-rate move" on Monday and the Federal Reserve’s attempts to restore liquidity on Tuesday were not enough to provide a sustained boost in the US dollar. Looking ahead, Thursday’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. As Technical Strategist Jamie Saettele mentions in his Daily Technical Report, the quick drop to 1.5282 was likely the end of a wave 4 correction and new highs are expected, where wave 5 would equal wave 1 at 1.5601, a possible objective.

Equities – Dow Jones Industrial Average

The daily charts of the Dow Jones Industrial Average look highly bearish, especially after the index failed to break above resistance at the 12,185 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 support below at 11,975/12,000. On Thursday, 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.