In the previous lesson we discussed Non Farm Payrolls (NFP’s) and why this is one of the economic indicators that causes the biggest moves in the markets. In this lesson we are going to discuss another economic indicator which can create large amounts of market volatility, Retail Sales.
The retail sales number is released at 8:30 am on or around the 13th of each month, and is an estimate of the sales of goods by all retail establishments in the United States. These goods fall into the personal consumption expenditures category, which as we discussed in our lesson on GDP, makes up over 65% of the US Economy. Although the number does not include anywhere near the data that is included in GDP, since this number is released for each month (where GDP is released for each quarter) it is closely watched by the Fed and other market participants as a timelier indicator of what is happening with the consumer.
In addition to the widely reported headline number, the report that is issued along with the retail sales number includes a breakdown of retail sales growth by category. With this in mind the report is not only a good indicator of overall consumer activity, but also for how different parts of the economy such as automobile, restaurant, clothing and electronics sales are fairing. If you are trading the stock of a company which sells products related to one of the categories reported in the retail sales release, then it is obviously important to understand that what happens with the growth of that category is most likely going to have a direct affect on the price of the stock that you are trading.
Like many of the things that we are discussing, the retail sales number is looked at not only for its timely reporting on growth in a large part of the economy, but also for its predictive powers regarding inflation. A healthy economy should show strong retail sales numbers, however if the number grows too quickly then there is a danger that growth in consumer demand will outpace supply growth, causing prices to rise and forcing the Fed to raise interest rates to reign in growth. To predict how the market will react to increases or decreases in the retail sales number, an understanding of where the economy is in the business cycle as we learned in our lessons on the subject is necessary.
If for example we are in a period where inflation is thought to be contained and growth is a worry, then a strong retail sales number should rally the market. If however we are in a high growth period already, then a strong number can cause market sell offs as participants anticipate Fed interest rate increases to reign in growth.
As with every economic indicator we study, remember that markets anticipate, so the market reaction will more times than not have a greater dependence on where the number comes out in regards to the consensus estimates, rather than how strong or weak the reported number is in relation to previous numbers. If the number comes out in line with estimates then at least in theory this should already be priced into the market and therefore market volatility after the number should be contained. If however the number comes in off estimates then you can see dramatic market volatility, the size of which is going to depend on how far the number comes in off estimates and where we are at in the business cycle.
As with all the indicators we are studying you really have to follow the number for several releases to get a feel for what the market is focused on and how it is going to react under different scenarios when the number is released.