Consumer Crunch Time

The US consumer came through once again on Thursday with strong numbers in the June retail sales report and that helped lift the US dollar. USD was the top performer Thursday while the Australian dollar lagged. Today, euro is the biggest gainer behind CHF as traders await the EU's effort to finalize the the 750 billion-euro recovery fund over the next few days (more below). European stocks and bonds have rallied on optimism of a historic accord. But negotiators are playing down the chances. Major US indices continue to diverge, this time NASDAQ on the downfoot after Netflix said it expected 2.5 million new users in Q3, less than expectations and far below 10.1 million subscribers gained in Q2.  The US consumer will stay in focus Friday with the University of Michigan consumer sentiment survey (more on US consumers below). 

The EU Summit will discuss the 500 billion euros in debt given as grants and 250 billion euros in loans. Angela Merkel expects "very, very difficult negotiations". Note that the euro began its latest rally phase about 6 weeks ago when Germany and France first announced the EUR 750 bn proposal. Two Premium trades related to EUR pairs are currently +230 pips.

The old adage about never betting against the US consumer held true once again on Thursday as sales rose 7.5% compared to 5.0% expected. Incredibly, sales are now up 1.1% y/y and 2.9% excluding gasoline stations.   

Within those numbers, there are some massive changes. Sales at food services and drinking places are down 26.3% y/y while closing stores are down 23.2%. On the flipside, nonstore sales (online) were up 23.5% and home improvement stores were up 17.3%. There has also been a notable jump in auto sales, which were up 7.5%. The Beige Book also noted tight auto inventories and higher prices. On that front, China followed a similar path but shortly after the reopening, auto sales began to flag.

The numbers emphasize the high stakes as Congress debates another stimulus package because at the same time, US initial jobless claims were at 1.3m, higher than the 1.25m expected. That still double the pre-pandemic record and the pace of improvement has slowed. More than 18m Americans are still receiving some form of unemployment benefit.

The market remained jerky and choppy Thursday and Treasury yields were lower. The mood favored risk-off trades and the dollar held a solid bid.

In US trading, the U Mich survey at 1400 GMT is forecast at 79.0 from 78.1 last month. The report is a good forward-looking indicator on spending and the consumer and it should provoke a market reaction.