Dollar Consolidates Ahead of Retail Sales Data

August 15, 2023
  • U.S. yields are making new highs; July retail sales will be the data highlight; regional Fed surveys for August will start rolling out; Canada highlight will be July CPI data; Chile central bank minutes suggest some flexibility ahead
  • Germany reported a mixed August ZEW survey; U.K. reported mixed labor market data; BOE tightening expectations have picked up; Sweden reported July CPI
  • Japan reported firm Q2 GDP data; RBA released its minutes; PBOC unexpectedly its key 1-year MLF rate 15 bp to 2.50%; China data came in weaker than expected

The dollar is consolidating recent gains ahead of retail sales data. DXY traded at the highest level since July 6 near 103.458 yesterday and stopped just short of that day’s high near 103.572. Let's take things a step at a time but if that July high goes, it would set up a test of May 31 high near 104.699. It is currently trading just below 103. The euro is trading higher near $1.0935 but remains on track to test the July low near $1.0835. Sterling is trading higher near $1.2710 but remains on track to test the late June low near $1.2590. USD/JPY traded at a new high for this move near 145.85 and is on track to test the 150 area. Despite the softish jobs and CPI data, we believe the relative fundamental story should continue to move in favor of the greenback. As we expected, the recent FOMC, ECB, and BOJ decisions as well as the ongoing economic data underscore the divergence theme and so further dollar gains seem likely.


U.S. yields are making new highs. The 10-year yield traded near 4.23% after ending last week near 4.15%. This is a new high for this move and sets up a test of the October cycle high near 4.34%. Elsewhere, the 30-year yield traded near 4.33% after ending last week near 4.26%. This is also a new high for this move and sets up a test of the October cycle high near 4.42%. Even the 2-year yield is taking part as it traded near 4.98% after ending the week near 4.90% and sets up a test of the 5.12% cycle high from July 6. As a result, rates continue to move in the dollar’s favor as seen in the key 2-year differentials.

The recent data out of the U.S. suggest that a September skip seems more and more likely. However, there are clearly some underlying inflation concerns and so we still don't think the Fed is done hiking. The market seems to agree with us as WIRP suggests 10% odds of a hike in September, rising to nearly 40% in November. Kashkari speaks today and should provide some hawkish guidance.

July retail sales will be the data highlight. Headline is expected at 0.4% m/m vs. 0.2% in June, while sales ex-auto are expected at 0.4% m/m vs. 0.2% in June. The so-called control group used for GDP calculations is expected at 0.5% m/m vs. 0.6% in June. Consumption remains fairly strong, boosted by the firm labor market and solid wage gains. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q3 growth at 4.1% SAAR. Next model update comes later today after the data. August NAHB housing market index, July import/export prices, June business inventories, and June TIC data will also be reported today.

Regional Fed surveys for August will start rolling out. Empire survey kicks things off today and is expected at -1.0 vs. 1.1 in July. New York Fed reports its services index tomorrow. Philly Fed survey will be reported Thursday and is expected at -10.0 vs. -13.5 in July.

Canada highlight will be July CPI data. Headline is expected at 3.0% y/y vs. 2.8% in June. if so, it would be the first acceleration since April but would still be within the 1-3% target range. Base effects are low in H2 and so there will be some further upward pressure on the y/y rates in the coming months. Elsewhere, core median and core trim are both expected to fall from June to 3.7% y/y and 3.6% y/y, respectively. June manufacturing sales and July existing homes sales will also be reported today. Bank of Canada expectations have steadied. WIRP suggests nearly 25% odds of a hike September 6 and rising to around 55% for October 25 and 60% for December 6 before topping out near 75% January 24.

Chile central bank minutes suggest some flexibility ahead. At the July 28 meeting, the bank discussed a 75 or 100 bp cut but finally went with the bigger move. Some board members expressed concern that a 100 bp cut would lead to greater depreciation of the peso but “All five Board members agreed that this risk could be mitigated by a communication that would clearly state that the MPR was still inside the corridor considered in June, with an arrival level consistent with what surveys foresaw for the end of the year.” Looking ahead, the bank felt that rates would be cut 75 or 100 bp in the coming meetings, depending on the day, and that total rate cuts of 325-350 bp were needed by year-end. It stressed that “There was agreement that the magnitude of the first move did not impose any conditions on those of the subsequent moves, which could be smaller.”
Next meeting is September 5 and another 100 bp cut seems likely. However, August CPI data won’t be reported until September 8. The swaps market is pricing in 150 bp of easing over the next three months followed by another 175 bp of easing over the subsequent three months.


Germany reported a mixed August ZEW survey. Expectations came in at -12.3 vs. -14.9 expected and -14.7 in July, while current assessment came in at -71.3 vs.-63.0 expected and -59.5 in July. For the most part, this continues the deterioration in sentiment from the peak earlier this year and reflects the worsening outlook for Germany. August IFO business climate survey will be reported next Friday.

Market expectations for ECB policy remain subdued. WIRP suggest odds of a 25 bp hike stand near 60% September 14, rise to 85% October 26 and priced in for December 14. These odds will rise and fall with the data but Madame Lagarde clearly accentuated the negative last week and that’s what markets should focus on. What’s very interesting to us is that the ECB may stop hiking before the Fed does and we don't think the markets have priced this risk in yet.

The U.K. reported mixed labor market data. Unemployment was expected to remain steady at 4.0% for the three months ending in June but instead rose to 4.2% as employment fell -66k vs. 90k expected. This was the highest unemployment rate since October 2021 and suggests the labor market is loosening up a bit. Yet total average weekly earnings came in at 8.2% y/y vs. 7.4% expected and a revised 7.2% (was 6.9%) previously, while earnings ex-bonus came in at 7.8% y/y vs. 7.4% expected and a revised 7.5% (was 7.3%) previously. When all the recent wage agreements for public sector workers go into effect, this should put further upward pressure on average earnings.

Bank of England tightening expectations have picked up. WIRP suggests over 25% odds of a 50 bp hike September 21, while 25 bp hikes are priced in for November 2 and December 14 that would see the bank rate peak near 6.0% vs. 5.75% at the start of this week. This is still below the 6.5% seen at the start of last month. Looking further ahead, the swaps market sees the rate staying at 6.0% over the next twelve months before rate cuts begin in the subsequent twelve months.

Sweden reported July CPI. Headline remained steady as expected at 9.3% y/y, CPIF came in a tick lower than expected and remained steady at 6.4% y/y, and CPIF ex-energy fell a tick as expected to 8.0% y/y. Targeted CPIF remains far above the 2% targe. Next Riksbank meeting is September 21 and a 25 bp hike to 4.0% is expected. At its last meeting June 29, the bank hiked rates 25 bp to 3.75% and said rates would be hiked at least one more time this year. Forward guidance shifted slightly more hawkish as the policy rate was seen peaking at 4.05% in Q2 2024 vs. 3.65% in the April forecasts and staying there through Q2 2025 before falling to 3.75% by Q2 2026 vs. 3.35% in April. However, the swaps market sees about 60% odds of one more hike to 4.25% in H1 2024 and we expect those odds to rise further if inflation remains stubbornly high.


Japan reported firm Q2 GDP data. Growth came in at 1.5% q/q vs. 0.8% expected and a revised 0.9% (was 0.7%), while the SAAR came in at 6.0% vs. 2.9% expected and a revised 3.7% in Q1. It was the third straight quarter of acceleration but this time was driven purely by net exports, which contributed 1.8 ppt to q/q growth vs. -0.3 ppt in Q1. Private consumption subtracted -0.3 ppt from q/q growth vs. 0.3 ppt in Q1, while GFCF added 0.1 ppt from q/q growth vs. 0.4 in Q1. Inventories subtracted -0.2 ppt from q/q growth vs. 0.4 ppt in Q1, while public consumption added 0.1 ppt to q/q growth, same as in Q1. Growth in Q3 is likely to fall sharply as strength in net exports will be impossible to sustain given slower global growth. Furthermore, recent monthly indicators suggest that domestic activity was losing momentum as Q3 began.

Reserve Bank of Australia released its minutes. At that August 1 meeting, the bank kept rates steady at 4.10% and the minutes noted that “Consumption had already slowed significantly, there were early signs that the labor market might be at a turning point and inflation was heading in the right direction. Considering this and the forecasts, members observed that there was a credible path to the inflation target with the cash rate staying at its present level.” This language suggests a very high bar is in place for another hike. Of note, the RBA has kept rates steady for two straight meetings and Lowe will chair his last meeting September 5. Deputy Governor Michele Bullock takes over September 18 for a seven-year term as Governor and she will chair her first meeting October 3. WIRP suggest virtually no odds of a hike at either meeting, but then rise modestly to top out near 65% in Q1. Q2 wage index came in a tick lower than expected at 3.6% y/y.

People’s Bank of China unexpectedly its key 1-year MLF rate 15 bp to 2.50%. Consensus saw steady rates but it’s clear that policymakers are getting more concerned about the macro outlook. This means that monetary policy divergences are still widening and suggests further yuan weakness. The 10-year China-U.S. yield differential has widened to -164 bp, the most in favor of the dollar since 2007, while the 2-year gap has widened to -288 bp, the most since 2006. These should continue to widen. USD/CNY is trading at new highs for this year near 7.2835 and is on track to test the November high near 7.3275. Similarly, USD/CNH is trading at new highs for this year near 7.3210 and is on track to test the October high near 7.3750. Of note, reports suggest policymakers are mulling a cut in the stamp duty on stock trades in an effort to boost share prices.

July IP, retail sales, fixed asset investment, and property investment came in weaker than expected. IP came in at 3.7% y/y vs. 4.3% expected and 4.4% in June, retail sales came in at 2.5% y/y vs. 4.0% expected and 3.1% in June, FAI came in at 3.4% YTD vs. 3.7% expected and 3.8% in June, and property investment came in at -8.5% YTD vs. -8.1% expected and -7.9% in June. Even though the economy remains weak, policymakers have been reluctant to inject large-scale stimulus, as evidenced by the weak July money and new loan data reported last week. That may change in light of the unexpected rate cut today.

We are nowhere near the end game of likely bailouts and haircuts. Near-term, China can muddle through. Longer-term? Not so much. With debt/GDP approaching 300%, there are limits to returning to the old debt-fueled stimulus. Furthermore, China can no longer grow their way out of their problems as it struggles to meet its target for this year tear “around 5%.” Besides the obvious downside risks to global growth, We don't yet have a firm grasp of the potential global financial impact from a debt event in China but that is clearly the big "known unknown." As always, the big "unknown unknowns" elude us until it's too late.

If things continue to go south in China, EM FX of course stands to weaken along with the yuan. Within the majors, AUD and NZD would tend to get hit hard. As things stand, both are leading this move lower in the foreign currencies and trading at new lows yesterday. For AUD, clean break below the May 31 low near .6460 sets up a test of the November 10 low near 0.6385 but really, we need to think about the October cycle low near 0.6170. For NZD, clean break below 0.5905 sets up a test of the November 3 low near 0.5740 but here too, we need to think about the October cycle low near 0.5510.

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