RETAIL SALES: A DEFINITION
Retail sales or the Retail Sales Index (RSI) is an economic indicator that serves as a gauge of the overall health of an economy by outlining consumer spending information. The report delivers an aggregate measure of retail goods and services spanning a months duration with the construct differing from country to country.
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As an illustration, in the U.S. the major component of the retail sales figure are auto dealers which is why the Census Bureau report contains a ‘Retail Sales Ex Autos’ and ‘Retail Sales Ex Gas/Autos’ to eliminate any potential irregularity (volatility) from the auto industry - this exclusion is also referred to as ‘Core Retail Sales’ in some instances. Graphically, the data should present similar to the below economic calendar:
Source: DailyFX Economic Calendar
Consumer spending is a key metric that drives economic activity so monitoring this data is essential for a company’s wellbeing as well as decision making (monetary and fiscal) going forward.
For example, when spending increases, business activity increases thus stimulating the economy and driving foreign investment. This in turn will impact other key economic components such as durable goods orders, consumer confidence, balance of trade, GDP and inflation to name just a few.
HOW IS RETAIL SALES MEASURED? EXAMPLES OF RETAIL SALES
The U.S. retail sales index comprises of various retailer types as shown below (Source: U.S. Census Bureau):
Motor vehicle and parts dealers
Furniture and home furniture stores
Electronics and appliance stores
Building material, garden equipment & supplies dealers
Food and beverage stores
Health and personal care stores
Gasoline stations
Clothing and clothing accessories stores
Sporting goods, hobby, musical instrument & book stores
General merchandise stores
Miscellaneous store retailers
Non-store retailers (online)
Food services & drinking places
The above categories are then weighted and accordingly using a sampling frame predefined by the U.S. Census Bureau and is subject to periodic changes.
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RETAIL SALES AND INFLATION
Positive retail sales data cannot always be taken at face value as the figure produced by the RSI is not adjusted for inflation. A positive figure once adjusted for CPI inflation can result in a net drop in retail sales. When inflation is high, the per dollar expenditure is reduced in terms of purchasing power which is why factoring in inflation is important for an all-inclusive representation of the economy.
HOW TO TRADE RETAIL SALES?
Trading retail sales is by no means straightforward but there are a few historical and noteworthy relationships between RSI and other markets. Beginning with the equity markets, retail sales traditionally exhibits a positive correlation to stocks because an increase in sales lends itself to higher company earnings. The graphic below shows how the U.S. equity markets (SPX) largely track fluctuations in retail sales data with an expected higher parallel with the retail sector as measured by the SPDR Retail ETF (orange).
U.S. RETAIL SALES VS S&P500 INDEX VS SPDR RETAIL ETF (2017 -2022)
Source: Refinitiv
Considering retail sales is largely comprised of auto sales in the U.S. (roughly 20% of the index), investors following the automotive industry can take clues from the motor vehicle sub category as to the current state and short-term outlook for local automotive manufacturers. The chart below outlines the rapport between the two variables by highlighting the positive correlation between retail sales data and two class leading manufacturers in Ford Motor Company and General Motors Company respectively. The same logic can be extended through to the other sub categories and utilized as an input for stock analysis in those corresponding fields.
U.S. RETAIL SALES VS FORD MOTOR CO. & GENERAL MOTORS CO. (2012 -2022)
Source: Refinitiv
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RETAIL SALES IN THE FOREX MARKET
As a general rule of thumb, improved retail sales usually translates to a positive for the home currency in question, while also adding to market volatility pre and post release. Following on with the U.S. as a template, retail sales data can have an influential impact on the central bank’s (Federal Reserve) decision making process. For example, if retail sales are slowing, the economic outlook may be considered bleak which may prompt the Fed to loosen monetary policy by cutting interest rates in hopes of stimulating the economy – the opposite will apply if retail sales are growing.
Supporting this positive correlation between currency and retail sales, the chart below shows a 6-month snapshot between U.S. retail sales data and the Dollar Index (DXY). There is a clear positive association between the two variables but as with all financial market analysis, there are always other factors at play that need to be considered in the evaluation process.
U.S. RETAIL SALES VS DXY (2022)
Source: Refinitiv
RETAIL SALES: A SUMMARY
Retail sales can assist traders regardless of trading style/strategy – technical analysis, fundamental analysis or a combination of the two. Understanding retail sales data can enhance one’s understanding of financial markets and the economics behind certain price movements. Retail sales can be incorporated across all financial market asset classes including stocks, FX, commodities and fixed income making it a great macro indicator for the broader market.
