Shockingly Weak Retail Sales--Risk Taken Off

The unexpectedly large drop in US May retail sales has perversely boosted the dollar in early North American trading as risk is taken back off.

The 1.2% drop is the largest fall since late Q3 09. The slight upward revision tot he April series (0.6% from 0.4%) is not enough to blunt the negative implications. Of the 13 major categories, 5 declined, led by a more than 9% decline in build-materials (which offset the 8.4% gain in April). Auto sales fell 1.7%, which seems to contradict the industry reports that showed higher sales. Gas station sales also fell 3.3%. Clothing was off 1.3% and general merchandise sales were off 1.1%.

For GDP purposes, the government uses the retail sales excluding autos, gasoline and building materials. This core measure fell 0.1% after a 0.2% decline in April. This weakness for the second month may prompt some to revise lower Q2 GDP forecasts. Personal consumption may make a smaller contribution to the economy.

The dollar has eased in recent days as growth outlook seemed to improve on the margins. Today's retails sales report undermines that fragile sentiment and has seen the greenback tick higher. At the same time, those fears of a double dip will be reinforced by the weakness in consumption following the disappointing jobs report a week ago.