Forex Markets to Look Past European Data, Eyeing US Retail Sales

Euro Zone Industrial Production headlines a thin economic calendar in European hours but traders are likely to have priced in the dismal state of manufacturing for some time already. Rather, the markets are likely to focus on the US Retail Sales figure set for release late into the session. Australian data surprised overnight as the economy added 1.2k jobs rather than shed -18.0k as was expected.

The Euro inched its way higher against the US Dollar in overnight trading, working to keep a foothold on the 1.29 level. The British Pound remained range-bound, oscillating in a 50-pip band above 1.4350.

Australian economic data painted a mixed picture of the larger antipodean economy. Consumer Inflation Expectation fell to 2.3% in February, the lowest in over a decade. Lower inflation is consistent with sluggish economic growth, suggesting Australians are decidedly dour in their outlook. The release is consistent with yesterday’s drop in consumer confidence reported by Westpac Banking Corp.

Interestingly, labor market data surprised to the upside in January with the Employment Change reading showing the economy added 1.2k jobs rather than shed -18.0k as was expected. More encouraging still, full-time jobs grew 33.7k, the most since July, while part-time jobs lost a nearly-equivalent 32.6k. The shift from part-time to full-time positions suggests employers are comfortable with committing to paying more for labor, meaning their outlook on future demand and thereby profits is not as bad as was supposed. Improvement in the labor market has scope to boost disposable incomes, spur consumption, and boost economic growth. This rosy outlook markedly conflicts with recently released data showing that business sentiment set a new record low in January as the global economic slowdown eroded companies’ overseas sales. Indeed, last week the trade surplus narrowed more than economists expected in December as iron ore shipments plummeted 26% while coal demand fell 5.06%. Adding further to the confusion, the Unemployment Rate rose despite the jobs gain to print at 4.8%, the biggest jump since February 2001. On balance, we see it critical to note that labor indicators are typically last to reflect cyclical changes in the economy. Considering that nearly every other measure of performance points downward, we are tempted to see today’s improvement in the headline jobs figure as a one-off uptick rather than the beginning of recovery.

Euro Zone Industrial Production headlines a thin European economic calendar, with expectations calling for a 9.5% drop in the year to December, the largest decline in 18 years. Shrinking global demand has seen companies cut back output and lay off workers, boosting the unemployment rate to a 2-year high of 8% as consumer confidence falls to the lowest yet on record. Overnight index swaps suggest the European Central Bank will return to cutting interest rates in March as the regional bloc’s economy continues to deteriorate, with traders betting on a 50 basis point cut to bring borrowing costs to 1.50%.

On balance, traders are likely to have priced in the dismal state of European manufacturing for some time already, suggesting the down print is unlikely to stir much volatility. Rather, the markets are likely to focus on the US Retail Sales figure set for release late into the session. US economic performance has been treated as a proxy for that of the globe at large as investors expect a rebound in the world’s largest consumer market to reverberate elsewhere