US Retailer woes, downside risk for EUR/JPY

Posted on November 16th, 2015

The sharp fall in US retailer equities and softer US retail sales data in recent months suggests that the stronger USD may be a factor weakening performance in this sector and should temper the outlook for US rate hikes and the USD. Events in Paris may at the margin increase the case for more aggressive ECB policy easing on 3 December.  The BoJ is expected to keep its policy steady for the foreseeable future as the focus in Japan is more on fiscal policy.  EUR/JPY is establishing a downtrend and relatively policy direction and risk of weaker global investor sentiment increases downside risk for EUR/JPY.


USA retail sector stocks hit hard on Friday

The S&P500 US consumer discretionary sector equity index fell sharply by 2.7% on Friday.  This sector had been strong over recent months rising to a new record high on 4 November, fully recovering from the August global market correction.

The fall came after weaker than expected results reports by Nordstrom late Thursday and Macys on Wednesday last week.  Nordstrom’s share price fell 15% on Friday.  Both companies downgraded their outlooks for the current quarter. JC Penny reported stronger sales growth on Friday, but its share price also fell 15% on Friday.

The US retail sales report was also somewhat disappointing, with growth losing momentum in the last few months after solid growth from March to July. Somewhat more encouraging was a recovery for a second month in the University of Michigan consumer confidence measure to around its average for the year, around the average level in the period before the 2008 financial crisis.

However, the strength of the USD and shift to online trading may be a factor that undermines retailing in the US.  The deep fall in these companies’ share prices should temper enthusiasm for the degree of rate hikes and the potential for the USD to strengthen over the year ahead.

On Friday, US 2yr swap rates fell 4bp dragged down by weaker US equities.  EUR and JPY were firming in the afternoon session of US trading as US equities came under pressure.

EUR range bound last week – topside hemmed in by dovish ECB

EUR struggled to rise on Friday in a choppy session as the prospect of more ECB policy easing appeared to contain the upside.

It rose to a high since the US payrolls report on Friday morning in Asia, squeezing some traders out of their recently established short EUR positions on a rise through 1.08 to peak at around 1.0830. Perhaps oddly it fell back in US trading on Friday despite the soft US equity market and lower US rates, albeit after another attempt to push through 1.08 in early-US trading.

Mid-session on Friday it tested recent lows since the payrolls report made several times last week in the low 1.07s, before finally taking notice of weak US equites and lower US rates late in the day, firming to around 1.0780 at the Friday close.

The events in Paris on Friday evening have seen a modest knee-jerk fall in the EUR, testing the lows over the last week, but as yet the recent range prevails.  (Lows over last week were from around 1.0680 to around 1.0710 – setting a support zone).

One might conclude that the tragic events may disrupt economic activity in France and Europe more generally, impacting in particular on tourism and consumer spending.  This effect should be short term, but to some extent it may increase the preparedness of the ECB to move more aggressively on easing policy on 3 December. They appeared ready to move anyway so it could be presented as a response to broader objectives and not specifically a response to the terrorist attacks, something officials would be keen to avoid.  In this sense the outlook for EUR is somewhat weaker.

However, at least until we get to the 3 Dec ECB policy meeting, where we find out how much the ECB cuts its deposit rate further below zero, the EUR may be responsive to global risk aversion and possible further selling of US equities in the wake of its poor retail sector performance on Friday.  This could provide support for the EUR as risk aversion may be seen to throw some doubt over the US rate hike outlook.

While EUR is balanced near term we remain bearish over the medium term and its performance over the last week has only consolidated its recent down-trend since mid-October.

ECB and Fed policy agenda in focus

There are many Fed and ECB speakers this week. Perhaps the most significant will be ECB President Draghi.  He speaks today in a low key opening statement at an industry gathering in Spain.  More important may be a speech he makes on Friday where he could set out more clearly the ECB agenda.  I expect this to emphasis plans for policy easing to boost the outlook for inflation.  And this should reinforce the bearish outlook for EUR.

On Wednesday, the ECB also releases its account of its 22 October monetary policy meeting that raised the odds for further policy easing in 3 December.  And on Thursday, the Fed releases the minutes from its 28 October FOMC policy meeting that raised the odds of a rate hike on 16-Dec.  We might presume that these accounts might also emphasize the different agenda’s and outlooks of the two central banks and also contribute to a weaker EUR.

BoJ likely to stay on hold – downside risk for EUR/JPY

The JPY was also surprisingly weak on Friday despite lower US rates.  Although, like the EUR, the JPY did firm towards the close as the fall in US equities and rates extended to the lows for the day at the close.   JPY is firmer in Asia on Monday as risk aversion increases and equites have traded down from Friday’s close.

The risk is that USD/JPY falls further this week in light of the disappointing performance of US retail sector equites on Friday and lower US rates.  The uncertainty generated by the terrorist attacks further places downward pressure on USD/JPY.

Japan’s GDP data was mixed and to some extent lessens the chance that the BoJ eases policy soon.  The headline real GDP growth was a bit weaker than expected confirming two-quarters in contraction. However, the fall was concentrated in business investment that can be volatile and might be expected to improve in light of high profitability and a tight labour market in Japan.  However, it might also reveal a continued preference by Japanese corporations to invest abroad, something the government may need to address.

Other aspects of the report provided less reason for the BoJ to ease further.  Nominal GDP was flat and the GDP deflator rose by 2.0%y/y, the largest rise outside of the consumption tax affected quarters in data available back to 1995, suggesting that the inflationary impulse is broadening across the economy.  Private consumption investment was also firmer than expected and residential investment has picked up in the last two quarters after the sharp drop post the consumption tax hike in 2014.

There is enough here to suggest the BoJ will stick to its inflation outlook as set out at the end-Oct in its semi-annual outlook, suggesting policy remains on hold through to the spring wage negotiations next year.

With the risk towards more ECB policy easing and the BoJ remaining on hold for the foreseeable future, there is a case for EUR/JPY weakness to resume.

The Fed may maintain expectations for a hike next month, but the soft US retail sector equities and more nervously global investors in the wake of the terror attacks may dampen the US rates outlook, adding to strength in the JPY, and potential downside for EUR/JPY.

EUR/JPY has trended down gradually since the BoJ left policy on hold on 30-Oct.  It has established itself below the previous lows in July and Sep.  This is consistent with the different tack taken by the BoJ (pushing out its timeline for achieving inflation) and the ECB (increasing the prospect for more easing to meet its inflation target within the same two to three year time-frame).

The BoJ has highlighted improving underlying inflation trends in its recent reports.  The GDP report further supports this case with a rise in the GDP Deflator.  At issue appears to be weak business investment, which may need more government persuasion rather than policy easing to address.  The focus in Japan is on further fiscal stimulus and corporate tax cuts in next year’s budget.  As such, we see little chance that the BoJ will ease policy on Friday.  The risk therefore appears greater for further weakness in EUR/JPY.


In the News

  • US retailing companies Macy’s (on Wednesday) and Nordstrom (on Friday) cut their outlooks for the year citing softer sales trends. Macy’s blamed a sales decline in Q3 on warmer than normal weather.  Nordstrom shares fell 15% on Friday.  Shares of both companies hit 2yr lows.  US retail sector of the S&P500 was the worst performing on Friday. (Nordstrom, Penney, Macy’s: Don’t Investors Know It’s Christmas? – WSJ.com0


What they said

  • USA Boston Fed President Rosengren expressed concerns over trends in commercial real estate and large syndicated loans. He said, “It would be a reason to maybe think about raising rates a little more quickly than otherwise would, given the same unemployment and inflation rate.” (Boston Fed chief flags lending risks –


Economic news

  • Japan GDP fell 0.2%q/q in Q3, weaker than -0.1% expected, after falling in Q2 by 0.2%q/q, revised up from -0.3%.
  • Nominal GDP was 0.0%, above -0.2% expected and revised up from 0.1%q/q to 0.2%q/q, implying faster than expected price increased, consistent with the GDP deflator that rose 2.0%y/y in Q3, faster than 1.7%y/y expected, up from 1.5%y/y in Q2, the largest increase outside of the consumption tax affected quarters.
  • Private consumption rose 0.5%q/q in Q3, more than 0.4%q/q expected, and was revised up from -0.7% to -0.6%q/q in Q2.
  • Business investment fell 1.3%q/q, much weaker than -0.5% expected and was revised down from -0.9%q/q to -1.2%q/q in Q2
  • Residential investment rose a strong 1.9%q/q, after a rising 2.4% in Q2
  • Exports rose 2.6%q/q in Q3 after falling 4.3%q/q in Q2
  • Imports rose 1.7%q/q in Q3 after falling 2.8%q/q in Q2.
  • New Zealand real retail sales rose 1.6%q/q in Q3, more than 1.4% expected, rebounding from 0.1% in Q2.
  • New Zealand services PMI was 56.2 in Oct, down from 59.0 in Sep, revised down from 59.3. The fall comes after the series made two consecutive record highs since 2007.   The three month moving average was at 57.9, down only a bit from 58.0 a month earlier, the high since 2007.
  • Australia: vehicle sales fell 3.6%m/m in Oct. They slowed to 4.2%y/y in Oct from 7.8%y/y in Sep, a high since 2013.
  • USA Retail sales rose 0.1%m/m in Oct, weaker than 0.3% expected, after 0.0% in Sep, revised down from +0.1%. Sales have been essentially flat since July. They rose 1.7%y/y in Oct, down from 2.2%y/y in Sep, a low since April.
  • Excluding autos sales rose 0.2%m/m in Oct, weaker than 0.4% expected, after falling 0.4%m/m in Sep, revised down from -0.3%y/y.
  • Excluding autos and gas sales rose 0.3%m/m in Oct, a little weaker than 0.4% expected, after a flat outcome in Sep (unrevised). Sales rose 3.5%y/y in Oct, down from 3.8%y/y in Sep, down from a recent peak of 4.3%y/y in July, to around previous lows this year in Apr and Jun.
  • USA University of Michigan consumer sentiment rose from 90.0 to 93.1 in Nov, above 91.5 expected, firming for a second month in a row from a low this year in Sep, now around its average for the year, around the levels experienced pre-2008 recession.
  • USA UoM 5-to-10 year inflation expectations were steady at 2.5% at the lowest level on record and now the lowest three month average on record at 2.6%. Still above the Fed’s inflation target of 2% and overall still stable, but an area of concern for the Fed.
  • Eurozone GDP rose 0.3%q/q in Q3, less than 0.4% expected after rising 0.4%q/q in Q2; it rose 1.6%y/y. German GDP rose 0.3%q/q in Q3, as expected; up 1.8%y/y.  French GDP rose 0.3%q/q as expected; up 1.2%y/y, slightly above 1.1% expected.  Italian GDP rose 0.2%q/q, a bit below 0.3% expected; it rose 0.9%y/y, a bit below 1.0% expected.
  • UK Construction output fell 1.6%y/y in Sep, weaker than -0.4% expected. However, it was revised up in Aug from -1.3%y/y to -0.6%y/y.
  • Singapore retail sales ex-auto fell 1.4%y/y in Sep, weaker than +0.7% expected, down from 1.9%y/y in Aug.
  • Malaysian GDP rose 4.7%y/y in Q3 as expected, down from 4.9%y/y in Q2, a low since Q3-2013.


On the Radar this week


  • Tuesday: RBA minutes; RBA Assistance Governor (Economics Dept) Kent speaks at a conference in Sydney in the morning ahead of the minutes.
  • Wednesday: Wage cost index; RBA Assistant Governor (Financial Markets) Debelle speaks at a conference in Sydney in the morning.
  • Friday: RBA Head of Economic Analysis Heath speaks at a government Resources and Energy event in Canberra in the morning.

New Zealand:

  • Tuesday: RBNZ surveyed 2yr Inflation expectations; Fonterra biweekly dairy auction.


  • Thursday: Trade balance; BoJ policy meeting


  • Through the week there are many Fed speakers every day.
  • Tuesday: CPI; Industrial production, NAHB housing market index
  • Wednesday: housing starts and permits; FOMC Oct 28 minutes


  • Monday: Manufacturing sales; existing home sales
  • Friday: Retail sales, CPI


  • There are many ECB board member speaking at conferences through the week and the ECB releases its account of the monetary policy meeting in October at which it put the market on notice for further easing in December. Draghi speaks twice this week. The second at a speech on Friday may be the most significant.
  • Monday: CPI final revision, Draghi speaks at a Roundtable of Industrialists in Spain (no text will be available);
  • Thursday: ECB account of the 22 Oct MPC meeting at which the ECB hinted at further policy easing in December; ECB’ Coeure and Prat speak
  • Friday: ECB President Draghi speaks in Frankfurt (text will be available)


  • Tuesday: CPI
  • Wednesday: Retail Sales; BoE Deputy governor Broadbent speech on the outlook for Britain’s recovery from the financial crisis, followed by Q&A; UK Government committee to hear testimony on the economic and financial costs and benefits of UK membership of the EU from business leaders.



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