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Rebate cash or just consumer spending?

Written by A Forex View From Afar on Thursday, June 12, 2008

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The retail sales are here, and much better than expected. The numbers were released at 1%, and the previous number also revised up to 0.4% from -0.2. Overall is pretty impressive if we judge that the economy is facing credit strains and consumers are struggling with falling house prices and even more expensive gas.

Only one type of business reported a decline from last month, miscellaneous stores retailers, while all others reported gains. The biggest gains were in gas sales and building materials.

If higher gas sales aren’t a surprise, since the retail sales release is not adjusted for inflation, the increase in building material sales are a big surprise. Some could call it huge surprise, since most metropolitan US areas reported double digit drops in prices from last year. Building materials are up 2.6% from last month, but overall are still under the last year sales.

A good explanation for this phenomenon could be house owners are trying to improve their houses, maybe to recover some of the missing value. It can be seen as a way to hedge the real estate losses.

Compared with last year the biggest drop in sales was recorded in the car sales industry. Sales are down over 6%, in a time when high-end luxury cars, like Mercedes, BMW and Porsche recorded a 15% drop from last year, suggesting more and more customers are chosing a Ford rather then a high end car. This can be called a downsize in sales, I think.

It’s not clear whether retail sales were helped by the stimulus check-rebates, or by consumers that just like to spend, but it’s clear that retail sales posted an unexpected number. US Equities rose at the time of the news release, while treasuries sold, showing markets are eager for any kind of confirmation that things will get better.

Having a consumer that is ready to open their wallet whenever needed means that the US GDP number has every chance of picking up momentum once again, and thus the Fed may have more running to do to tackle the inflation issue, thereby empowering the greenback further.

Any dollar appreciation will come with many still looking at the size of the negative trade balance, and as such we are likely to see plenty of pushing and shoving as the markets battle over dollar fair value. The dollar has won this week's battle, only another 30 to go to get to where we were before the sub-prime downgrades hit.

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