Dollar Firm Ahead of Retail Sales Data

February 15, 2023
  • January CPI data support our view that the fight against inflation is nowhere near over; Fed officials sounded hawkish yesterday; January retail sales data today will give us a read on the real economy; Fed Vice Chair Brainard will indeed head up the NEC; regional Fed manufacturing surveys for February start rolling out; Canada reports some minor data; political risk remain high in Brazil
  • The eurozone reported weak December IP and trade data; the U.K. reported soft January inflation data; Scottish political uncertainty has risen with the shock resignation of First Minister Nicola Sturgeon
  • RBA Governor Lowe pushed back against recent criticism; the IEA boosted its forecasts for global oil demand due to China reopening

The dollar is getting more traction ahead of retail sales data. DXY is up after two straight down days and trading near 103.581. Last week’s break above 103.793 still sets up an eventual test of the January high near 105.631. The euro is trading back near $1.07 after failing to break above $1.08 yesterday. The recent break below $1.0695 still sets up an eventual test of the January 6 low near $1.0485. Sterling is underperforming after soft CPI data and is trading near $1.2050. It remains on track to test last week’s new cycle low near $1.1960 and then the January 6 low near $1.1840. USD/JPY traded at a new high for this move near 133.50 today, the highest since January 6 and on track to test that day’s high near 134.75. The recent U.S. data have come around to support our more hawkish view on the Fed, which in turn supports our call for a stronger dollar. Market sentiment is swinging back in the dollar’s favor and we remain hopeful that the data continue to encourage this shift.


U.S. yields remain elevated. The 2-year yield traded near 4.64% yesterday, the highest since November 9 and on track to test the November 4 cycle high near 4.80%. The 10-year yield traded near 3.80% yesterday, the highest since January 3 and on track to test the December 30 high near 3.90%. After that, the next target is the November 8 high near 4.24%. The move higher coincides with renewed inflation concerns and a repricing of Fed tightening expectations. Today’s retail sales data and tomorrow’s PPI data will be key in determining whether these recent market trends continue.

January CPI data support our view that the fight against inflation is nowhere near over. Headline came in at 6.4% y/y vs. 6.2% expected and 6.5% in December, while core came in at 5.6% y/y vs. 5.5% expected and 5.7% in December. The m/m readings have taken on more importance after the annual revisions boosted those readings in H2; here, both headline and core came in as expected at 0.5% and 0.4%, respectively. Attention now turns to January PPI, which will be reported tomorrow. Headline is expected at 5.4% y/y vs. 6.2% in December, while core is expected at 4.9% y/y vs. 5.5% in December. Of note, PPI revisions were reported yesterday. Similar to what we saw with the CPI revisions last week, the December m/m gain for headline was revised up to -0.4% vs. -0.5% previously, while core PPI was unchanged at 0.1%.  For November, both headline and core PPI m/m gains were revised up to 0.3% m/m vs. 0.2% previously.

Fed tightening expectations remain high. WIRP suggests 25 bp hikes March 22 and May 3 are now priced in. Furthermore, a third 25 bp hike is nearly 75% priced in after the CPI data. If that happens, the Fed Funds target range would move to 5.25-5.5%, above the December Dots. As we've pointed out before, it would only take 2-3 Fed officials raising their expected end-2023 rate to get a hawkish shift in the March Dot Plots. And yet, markets are pricing in an easing cycle in Q4. This is the next leg of the Fed repricing that we see ahead.

Fed officials sounded hawkish yesterday. Barkin said risks are on the inflation side rather than the real economy side. He said the jobs reports was much stronger than expected and made a good case for leaving rates higher for longer. He added that if inflation persist above target, the Fed may have to do more. Logan said the most important risk the Fed faces is tightening too little. She stressed that the Fed shouldn’t lock in on a peak rate or precise rate path. She said she seeks a “clear change” in underlying factors for inflation and added that she favors gradual hikes until there is a convincing drop in inflation. Harker said the Fed needs to maintain the path of 25 bp hikes. He expects the peak to be above 5% but how much above remains unclear. He added that he doesn’t know yet what the FOMC will do at the March meeting and noted that CPI data showed inflation is coming down slowly. Williams said rates may need to go higher if inflation stays high for longer. He noted that a year-end range of 5.0-5.5% for the Fed Funds rate seems to be the right frame of reference, adding that the Fed will keep a restrictive stance for some time.

January retail sales data today will give us a read on the real economy. Headline is expected at 2.0% m/m vs. -1.1% in December, while ex-autos is expected at 0.9% m/m vs. -1.1% in December. The so-called control group used for GDP calculations is expected at 1.0% m/m vs. -0.7% in December. Of note, the Atlanta Fed’s GDPNow model is currently tracking 2.2% SAAR growth in Q1, up from 2.1% previously. Next model update will be today after the retail sales data. University of Michigan consumer sentiment rose a point and a half to 66.4 in February, the highest since January 2022. Along with the strong labor market, this suggests potential for consumption to remain robust as 2023 gets under way.

As reported yesterday, Fed Vice Chair Brainard will indeed head up the National Economic Council. Her resignation from the Fed will be effective on or around February 20 and leaves the FOMC short-handed after a rare (but brief) period of having no vacancies. The transition comes at a challenging time for both the Fed and President Biden’s economic team. Brainard is considered one of the leading doves on the FOMC.

Regional Fed manufacturing surveys for February start rolling out. Empire survey kicks things off today and is expected at -18.0 vs. -32.9 in January. Philly Fed reports tomorrow and is expected at -7.5 vs. -8.9 in January. January IP will also be reported today and is expected at 0.5% m/m vs. -0.7% in December. Within IP, manufacturing is expected at 0.8% m/m vs. -1.3% in December. This sector is clearly slowing but so far has not had much impact on the wider economy, which remains resilient. December business inventories, February NAHB housing market index, and December TIC data will also be reported today.

Canada reports some minor data. January housing starts, existing home sales, and December manufacturing and wholesale trade sales will all be reported. After the second straight blowout jobs report, the Bank of Canada will find it harder and harder to justify its pause. No change is expected at the next meeting March 8 but WIRP suggests a final 25 bp hike to 4.75% is now priced in by July 12.

Political risk remain high in Brazil. Government officials had to deny press reports that President Lula had ordered a one percentage point increase in this year’s inflation target from 3.25% currently. However, the denial was weak sauce as the officials only said that Lula did discuss the notion but has yet to make up his mind on whether to increase it this week. Of note, Finance Minister Haddad said that the inflation target is not on the agenda for Thursday’s meeting of the National Monetary Council (CMN), the body responsible for setting them annually. Elsewhere, Senate President Pacheco said that revising the inflation target would send a bad signal and again defended the central bank’s autonomy. However, market confidence in Lula has clearly been shaken and it will not come back so easily.


The eurozone reported weak December IP and trade data. IP came in at -1.1% m/m vs. -0.8% expected and a revised 1.4% (was 1.0%) in November. As a result, the y/y rate came in at -1.7% vs. -0.7% expected and a revised 2.8% (was 2.0%) in November. This was the first negative y/y reading since July. While some sentiment indicators have been improving recently, the real sector data remain weak and so we cannot get excited about the eurozone economic outlook for 2023. Elsewhere, the adjusted trade deficit came in at -EUR18.1 bln vs. -EUR16.0 bln expected and a revised -EUR14.4 bln (was -EUR15.2 bln) in November. December current account data will be reported Friday.

ECB tightening expectations have edged higher. WIRP suggests a 50 bp hike March 16 is nearly priced in. Looking further ahead, a 25 bp hike May 4 is priced in along with 30% odds of a larger 50 bp move. Another 25 bp hike June 15 is priced in, followed by around 65% odds of one last 25 bp hike in Q3. These expectations are likely to drift lower if continued disinflation gives the doves the upper hand. We have already seen the cracks reappear last week. De Cos said that recent eurozone inflation data were encouraging but warned that the ECB must remain cautious. Lagarde speaks later today.

The U.K. reported soft January inflation data. Headline came in at 10.1% y/y vs. 10.3% expected and 10.5% in December, core came in at 5.8% y/y vs. 6.2% expected and 6.3% in December, and CPIH came in at 8.8% y/y vs. 9.0% expected and 9.2% in December. Falling gasoline prices were largely responsible for the drop in headline inflation and while this is certainly welcome, more needs to be done as it remain five times the 2% target. ONS Chief Economist Grant Fitzner noted “There are further indications that costs facing businesses are rising more slowly, driven by falls in crude oil, electricity and petroleum prices. However, business prices remain high overall, particularly for steel and food products.” A separate ONS analysis showed that inflation was hitting low-income households the hardest. This is very important and tomorrow’s retail sales data will be closely watched to see how this has impacted consumption.

BOE tightening expectations have steadied. WIRP suggests a 25 bp hike March 23 is nearly priced in. After that, a final 25 bp hike is nearly priced in for June or July and so the expected terminal rate is now back to 4.5% after starting off last week near 4.25%. This is still well below the peak near 6.25% right after the disastrous mini-budget back in September. BOE officials have tilted increasingly dovish in recent weeks and the continued disinflation means this is likely to continue. Sterling should continue to underperform as a result.

Scottish political uncertainty has risen with the shock resignation of First Minister Nicola Sturgeon. She said “It might seem sudden, but I have been wrestling it obviously with oscillating levels of intensity for some weeks.” Her exit comes at a very uncertain time for Scotland after the U.K. last month overruled Scotland’s parliament for the first time when it rejected a gender bill that had been passed in Edinburgh. At that time, Sturgeon warned that this was “a full-frontal attack on our democratically elected Scottish Parliament and its ability to make its own decisions.” Many expected Sturgeon to use that rejection as justification for renewing calls for greater Scottish autonomy or even a new independence referendum, so her exit now is even more surprising. That said, many observers have been skeptical that the rejection of the gender bill is enough of an issue to boost pro-independence support within Scotland.


RBA Governor Lowe pushed back against recent criticism. He said he wouldn’t resign and justified the bank’s current policy trajectory, noting that “There is a risk that the tightening of policy that’s taken place does dampen spending more than we think. But there is a risk on the other side. There is a risk that we have not yet done enough with interest rates.” We do think criticism of the RBA is perhaps a bit unfair. Did it wait too long to tighten? Probably, but nearly every major central bank is in the exact same position. We can take issue with Governor Lowe holding closed door meetings with the major banks, but we’ve seen that here in the U.S. and in other countries. That said, the backlash against Lowe seems strong and there seem to be growing odds that he is not reappointed when his first term ends in September. Of note, WIRP suggests a 25 bp hike at the next meeting March 7 is nearly 80% priced in, while the swaps market is pricing in a peak policy rate near 4.20% over the next 6 months. Of note, an easing cycle in the subsequent 6 months is getting increasingly priced out, as well it should.


The International Energy Agency boosted its forecasts for global oil demand due to China reopening. It raised its global oil demand forecast for Q1 by 500k bbl/day to a total of 100.1 mln bbl/day. The IEA sees global oil demand rising throughout the year to 103.5 mln bbl/day in Q4. For China alone, it forecasts oil demand at 15.2 mln bbl/day in Q1, rising to 16.7 mln bbl/day in Q4. The IEA noted that “China’s reopening will give a welcome boost to the listless world economy. The country is set to resume its established role as the primary engine of world oil demand growth.” It added that “World oil supply looks set to exceed demand through the first half of 2023, but the balance could quickly shift to deficit as demand recovers and some Russian output is shut in.” Faithful readers will know that we remain very skeptical that China reopening will be this magic bullet for global growth that markets are pricing in. Simply put, whatever growth China posts this year will not be enough to offset the slowdown and likely recession in the rest of the world. Furthermore, China is turning increasingly inward and early 2023 data from Japan, Korea, and Taiwan show little impact so far on regional activity and growth. Oil prices are down nearly 1% today.

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