Advance Retail Sales (JUL) (08:30 ET; 12:30 GMT)
Expected: 0.2%
Previous: -0.9%

Retail Sales ex. Autos (JUL) (08:30 ET; 12:30 GMT)
Expected: 0.3%
Previous: -0.4%

How Will The Markets React?

Retail sales growth slowed significantly during the month of June, unexpectedly slumping 0.9 percent from the month prior as purchases of motor vehicles, gasoline, furniture, building materials and clothing took a hit. The softness was not surprising given the fact that gas was still above $3/gallon on average, consumers invested less in their homes, and retailers such as Macy’s and Kohl’s reported disappointing apparel sales. What may be surprising, however, is if we see retail sales pick up during the month of July in line with expectations, as there is evidence that we will see another weak showing. First, both the ICSC same-store sales report and the SpendingPulse index showed a sharp slowdown in apparel purchases. Furthermore, with softness in the housing sector still clearly an issue, spending on furniture and building materials isn’t likely to see gains. On the other hand, discounters such as Wal-Mart and Target both reported improved same-store sales for the month, but at the same time, this likely only came as a result of heavy discounting which will only squeeze profit margins. However, the wealthy could come to the rescue, as ICSC and SpendingPulse also reported that sales of luxury goods jumped more than 10 percent from a year ago. Forex markets may be the only one to respond to the retail sales report, as fixed income and equity markets remain focused on the fears surrounding evidence of a pronounced liquidity crunch.

Bonds – 10-Year Treasury Note Futures

Fibonacci resistance at 108-05 may have put an end to the recent rally for 10-year Treasury note futures, as prices have since eased back to form the beginning of what could be a downtrending channel. However, given the choppy price action and spike in market volatility seen in recent days, Treasuries could easily resume their march higher. Though this week’s CPI report will likely make the biggest impact on US government bonds this week, a surprising retail sales report could shake things up. Spending is estimated to have increased in July, which could lead 10 year notes lower. However, if the figure is unexpectedly weak for the second month in a row, prices could push towards 108-05 once again as the news would hurt prospects for economic growth in the third quarter.

FX – EUR/USD

Since hitting record highs of 1.3852, the EUR/USD has remained contained to a 200+ point range over the past few weeks as the oversold US dollar has attempted multiple comebacks. Fortunately for greenback bulls, fixed income market expectations that the Federal Reserve will cut rates in September have had little impact on the currency. However, data due out this week could ring a different tune for EUR/USD, as retail sales and CPI are both scheduled to be released. While CPI on Wednesday will be the biggest market mover, traders should beware retail sales on Monday, as a surprising reading could spark volatile price action for the pair. Spending is anticipated to pick up 0.2 percent in July after plunging 0.9 percent the month prior, which would support the Fed’s forecasts that the economy will expand at a “moderate pace in coming quarters,” and could help push EUR/USD to break trendline support to target 1.3600. On the other hand, a second month of dismal consumption data may stoke fears that the economic slowdown in the US will only worsen throughout the year as the problems linked to subprime mortgages spread into other sectors. As a result, the US dollar could soften enough to push EUR/USD back up to 1.3800.

Equities – S&P 500 Index

It’s no secret that volatility has spiked in recent days, as liquidity concerns led to massive sell-offs in the US equity markets. Nevertheless, the 38.2% fib of 1,224.94 – 1,555.90 at 1,429.32 has served as sturdy support for the S&P 500, as price action has not managed to break below that level. Furthermore, if Monday’s retail sales report improves in line with expectations, the equity index could begin to recover. However, this will depend more upon risk aversion trends, as more news of a possible liquidity crunch could leave traders selling stocks amidst flight to quality.

Terri Belkas is a Currency Strategist at FXCM.