American Shoppers In Focus

June 18, 2024

American Shoppers In Focus

  • The US May retail sales report is today’s main highlight. Risks are skewed to the upside.
  • RBA delivers another hawkish hold. AUD outperforms and Australian bonds underperforms.
  • BOJ Governor Ueda leaves the door open for a July rate hike.

 

USD is a little firmer following yesterday’s data-light trading session. In our view, the favourable US macro backdrop justify a reassessment in Fed funds rate expectations in support of a higher USD and Treasury yields. Fed funds futures continue to price-in about 50bps of cuts by December 2024 while the Fed has only one rate cut pencilled-in.

The US May retail sales report is today’s main highlight (1:30pm London). Market participants expect retail sales to rebound 0.3% m/m after stalling in April. Importantly, the control group retail sales used for GDP calculations is forecast to rise by 0.5% m/m following a -0.3% decline in April.

Solid US non-farm payroll gains and higher average hourly earnings growth in May point to upside risk to today’s retail sales print. If so, the swaps market can further curtail expectations of Fed funds rate cuts and add upside momentum to USD.

Philadelphia Fed President Patrick Harker (non-voter) said yesterday “one rate cut would be appropriate by year’s end”, adding “I see two cuts, or none, for this year as quite possible if the data break one way or another.” His comments essentially reflect the split in the 2024 Fed officials dot plot projection: 4 no change, 7 one cut, 8 two cuts. There a plenty of Fed speakers today including Barkin, Collins, Logan, Kugler, Musalem, and Goolsbee.

AUD outperformed and Australian bonds underperformed after the RBA delivers another hawkish hold. As was widely expected, the RBA left the cash rate target at 4.35% and reiterated that “the Board is not ruling anything in or out”. Importantly, RBA Governor Michele Bullock confirmed during her press conference that the Board discussed the option of raising rates while the case for a rate cut was not considered.

Indeed, the RBA remains concerned about Australia’s inflation backdrop suggesting the bar for easing policy is still high. The RBA noted “inflation remains above target and is proving persistent” and emphasised again that “the Board expects that it will be some time yet before inflation is sustainably in the target range”. The RBA added a new line that states it “will do what is necessary” to return inflation to target. In our view, AUD can edge higher versus CAD because unlike the Bank of Canada, the RBA is in no rush to cut rates.

USD/JPY corrected by about 0.30% overnight to lows around 157.50. Bank of Japan (BOJ) Governor Kazuo Ueda pointed out it was possible to raise rates in July depending on data. Friday’s Japan May CPI data will guide the BOJ’s July policy rate decision. So far, the swaps market implies a 40% probability of a July rate hike.

EUR/USD recovered slightly to highs near 1.0740 overnight. The June ZEW survey of financial market experts’ sentiment concerning the German growth outlook can offer EUR some intra-day support (10:00am London). The expectations component is anticipated to improve to a 50, the highest since February 2022.

Regardless, French political uncertainty remains a headwind for EUR. The premium on French bonds over German bunds is holding near a seven-year high despite right-wing leader Marine Le Pen (who’s party leads the polls ahead of the June 30/July 7 legislative elections) attempt at reassuring the financial community. Le Pen made it clear she’s “respectful of institutions; I do not call for institutional chaos”. Le Pen also remarked that some measure her party are proposing “are a priority, urgent and very important…There are others that are good measures, but that can be implemented later in the mandate, depending on the manoeuvre margins we manage to find.” Nevertheless, her party’s program lacks detail on how to pay for the generous fiscal spending measures.

Chile central bank meets later this evening and is expected to cut rates 25 bp to 5.75% (11:00pm London). Of the 12 analysts polled by Bloomberg, 1 sees steady rates, 7 see a 25 bp cut, and 4 see a larger 50 bp cut. At the last meeting May 24, bank members unanimously decided to cut rates 50 bp to 6.00% and emphasised again it foresees “further cuts” to the policy rate. Inflation in Chile has been sticky around 4% since April which argues for caution by the central bank. The market has fully priced-in 125 bp of total easing over the 12 months that would see the policy rate bottom at 4.75%.

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