Unexpected Drop in January German Retail Sales Raises Concerns

Highlights

• In January, German retail sales saw an unexpected 0.4% decrease following a 1.6% drop in December.
• It's unlikely that the German retail sales report will change the overall feeling about the German economy or expectations for an ECB interest rate reduction in April.
• The inflation figures for February in Germany will influence feelings about potential ECB interest rate decreases.  

German Retail Sales Report: Impact on ECB Monetary Policy

January Retail Sales Performance

Investor attention turned to German retail sales during the European session. However, the report revealed a disappointing trend:

• Decline in Sales: Retail sales in Germany fell unexpectedly by 0.4% month-on-month in January, following a 1.6% decrease in December. Projections had anticipated a 0.5% increase.
• Sectoral Analysis: While food retail sales saw a modest uptick of 1.1%, non-food retail products stagnated. Year-on-year comparisons showed a 1.4% decline in retail sales compared to January 2023.

Implications for ECB Monetary Policy

The weakened retail sales data is unlikely to sway investor expectations regarding an April ECB rate cut, given the consistent downward trend since June 2023.

• Upcoming Data Considerations: Attention shifts to German unemployment and inflation numbers later in the day. Forecasts suggest a drop in the annual inflation rate from 2.9% to 2.6%, potentially influencing speculations about an April rate cut.
• Impact on EUR/USD: The EUR/USD exhibited slight fluctuations, initially rising to $1.08403 before dipping to $1.08279 pre-report. Post-report, it fluctuated between $1.08302 and $1.08379, eventually settling down by 0.02% at $1.08361.

Focus on US Personal Income and Outlays Report

With attention shifting to the US, the release of the Personal Income and Outlays Report is anticipated to draw market focus, particularly on the Core PCE Price Index:

• Core PCE Price Index: Economists project a 2.8% year-on-year increase in January, following December's 2.9% rise.
• Inflation Trends: Rising personal income and spending could contribute to demand-driven inflation, influencing market sentiment.
• FOMC Member Speeches: Remarks from FOMC members, including Raphael Bostic, Austan Goolsbee, Loretta Mester, and Fed Vice Chair John Williams, will be closely monitored for reactions to the inflation data.

Other US Economic Indicators

Additional US statistics, such as the Chicago PMI, initial jobless claims, and pending home sales, will play a secondary role compared to the Personal Income and Outlays Report. However, they contribute to the broader economic landscape and warrant attention amidst ongoing market volatility.