Friday, May 15, 2020

Are US consumers becoming more optimistic of pessimistic of the current situation as lockdowns restrictions start to ease?

Tags
  • China
  • Dollar
  • US Retail Sales
  • DXY

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Analysts’ Pick: Are US consumers becoming more optimistic of pessimistic of the current situation as lockdowns restrictions start to ease?

  • The full impact of lockdowns in the US will be reflected in today’s economic data
  • Expect retail sales to fall across all sectors with the exception of consumer staples and healthcare. Auto and gas sales will likely suffer the most.
  • Empire manufacturing for May should show some improvement since a number of Covid-19 restrictions were eased at the start of May
  • ISM’s PMI report suggests industrial production in April will sharply decline with factories either remaining shut or reducing capacity
  • Our outlook for the greenback remains skewed to the upside as a result of the likely weaker-than-expected economic data and risks stemming from US-China relations and the Covid-19 pandemic

Retail sales for April in the US will probably be reveal downward pressure across all sectors. Auto sales in the US plummeted in March and further dropped in April, signalling that April's retail sales will likely decline from March as well. The 17.6% drop in gasoline prices in the US resulting from the oversupply in the crude oil market will also translate to lower contribution to headline retail sales. The decline in gasoline prices however, potentially may understate the full impact of pressure on gas sales as travel restrictions continue to dampen topline revenue for gas providers as well. While large corporations saw some return of demand for goods towards the end of April in the latest earnings reports, this information will likely only be fully reflected in May's dataset. Decline in consumer confidence, spending and income will likely have widened as well, with unemployment reaching record levels (Nonfarm payrolls dived by 20.5mn). As a result, headline retail sales data for April may be in line with economists' forecast at -12%, but core retail sales (ex. Auto and gas sales) may come in slightly better-than-expected as a result of both a fall in demand for gas and decline in its prices.

Gas prices bottomed out in April while auto sales suffered another decline from March

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Empire manufacturing and industrial production numbers will be a driver for the dollar later today. The Empire manufacturing survey should see some improvement for May as April was likely the peak of the impact from lockdowns that businesses faced. But the index will most likely still be within the negative range. Released manufacturing PMI data from ISM for April suggests that industrial production may be more heavily impacted than expected. The production sub index in ISM's report reached its lowest figure and declined the most since the start of the survey in 1948. Employment sharply dropped as well, implying that factories are likely not producing at anywhere near full capacity. In addition, aircraft manufacturers and automakers continue to face demand headwinds and will likely contribute the most to industrial production numbers. We expect headline industrial production to drop more than expected as a result.

Misleading strength in supplier deliveries resulted in an overstatement of ISM’s manufacturing PMI

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Finally, the consumer sentiment survey by the University of Michigan is expected to decline further, as more bad news on economic conditions start to arise. The sharp increase in unemployment and expectations for a steep economic contraction will likely continue to weigh on consumer sentiment in the short-term, although consumers will probably be more optimistic on future expectations as lockdowns start to be incrementally lifted. Worries for a second wave of new Covid-19 infections will probably also weigh on consumer sentiment especially with new clusters reportedly emerging in South Korea, Germany and China after they started to lift Covid-19 restrictions.

Record high unemployment will eventually spill over to consumer sentiment and spending as personal income erodes

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Our outlook for the dollar is mostly skewed to the upside as its safe haven properties are likely to increase in demand as a result of weaker-than-expected data. Non-data driven risks also skew the dollar to the upside in the short-term. With many states in the US pressured to lift Covid-19 restrictions, premature reopening can imply that the likelihood for an acceleration in new Covid-19 infections is increasing. This has the consequential effect of possibly increasing the number of deaths in the country, as well as delaying lockdowns from being lifted, delaying an economic recovery to much further than anticipated. Escalating tension between the US and China is also a key risk that traders will be watching as US President Donald Trump and other US officials have increasingly been more vocal about concerns regarding China and the origin of the Covid-19 virus in the past week. As a result, the Dollar Index could possibly rise slightly towards 100.52's level as negative economic data increases pessimism in the market later today. In the short-term if US-China tensions escalate or if news of increasing new Covid-19 infections surface, then the Dollar Index may appreciating against major currencies, pushing the Dollar Index higher to break 100.62 and trend towards 100.84's level.

Technical Analysis:

DXY

The Dollar Index experienced a reversal at the start of May resulting in bulls taking control of the greenback in the short-term. After pushing past 100.00’s level bulls are likely to try to retest the 50% Fibonacci retracement level at 100.62 as bears try to put pressure on the index. The strong resistance at 100.52 signals that if the Dollar Index breaks that level we may see the bulls break the 50% Fibonacci level as well, although DXY may not be able to sustain at that level as traders will likely shift into short positions on the dollar near 100.84. But today’s weak economic data may provide the bulls with some support to push the Dollar Index higher. In addition, as risks are tilted more towards the upside for the dollar, momentum for the DXY may be lifted by increased long positions in the market.

Support: 100.12 / 99.99 / 99.81

Resistance: 100.52 / 100.84 / 101.07

DXY Chart (H4)

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