With a severe earthquake and tsunami hitting Japan, waves reaching as far as Hawaii and talk of Portugal requiring a bailout if Germany votes no on expanding the EFSF, we would be surprised if risk appetite managed to hold steady. The latest shock to the world's third largest economy drove investors into the arms of the U.S. dollar in an environment where everyone is already nervous about the risk posed by high oil prices and the ability of EU leaders to reach an agreement that would avoid pushing Portugal and Spain into the arms of the EFSF. The better than expected U.S. retail sales report was completely overshadowed by the developments in Japan and Europe as well as softer economic reports from other parts of the world.
Nonetheless, the monthly consumer spending report is a very important one and a key input into the Federal Reserve's monetary policy decisions. With the next FOMC meeting scheduled for next week, the improvement in consumer spending could give central bank officials a stronger reason to alter the "extended period" language and end asset purchases in June. The Fed may not be able to avoid growing less dovish if the unemployment rate is falling and inflation plus consumer spending is rising.
Retail sales rose 1.0 percent in the month of February from upwardly revised growth of 0.7 percent the previous month. This was the strongest pace of growth in four months and the breakdown of the report shows an underlying increase in demand that is not just caused by higher gasoline prices. Gas station receipts increased 1.4 percent but excluding auto and gas purchases, spending still rose 0.6 percent. As the weather improved, Americans spent more on electronics, clothing, sporting goods, and general merchandise. If this pace of spending continues, the choice of continuing or ending QE in June may not be a difficult one. In the meantime however, the University of Michigan consumer confidence survey is due for release later this morning. The rise in oil prices and fall in stocks has most likely put a dent in consumer confidence but the real focus will remain on Japan and the Tsunami warnings across the Pacific Coast. Once again, it will be difficult for risk appetite to recover today.