Dollar Bullish Story Intact

• US consumers keep fueling growth. Housing data and industrial production are in focus today.

• UK labour market conditions are easing but wage growth remains sticky.

• China Q1 GDP growth tops forecast but monthly activity data point at a tepid cyclical economic recovery.

USD rally is gaining momentum, Treasury yields are near multi-month highs and the correction in stocks resumed as solid US retail sales suggests the Fed is in no hurry to loosen policy. Fed funds futures now imply roughly 25% and 57% probability of a 25bps rate cut in June or July, respectively. A first Fed funds rate cut is fully priced-in for September.

US nominal retail sales beat forecast in March and the prior month was revised higher underscoring the resiliency of the US consumer. Total retail sales rose 0.7% m/m (consensus: 0.4%, prior +0.3pts to 0.9%). Sales excluding cars and gasoline increased 1.0% m/m (consensus: +0.3%, prior +0.2pts to 0.5%). Control group sales used for GDP calculations surged 1.1% m/m, the biggest monthly increase since January 2023 (consensus +0.4%, prior: +0.3pts to 0.3%).

The Atlanta Fed GDPNow model estimate Q1 real GDP growth at 2.8% saar vs. 2.4% previously. The next update is today, and the actual advanced Q1 US GDP print is released April 25.

Up next, US March housing data (1:30pm London) and industrial production (2:15pm London). Building permits are projected to fall 0.9% m/m vs. +2.4% in February and housing starts are expected to decline 2.7% m/m vs. +10.7 in February. The bigger picture is that single-family starts and permits are trending higher suggesting residential investment will remain a small tailwind to GDP growth. Meanwhile, industrial production is expected to increase 0.4% m/m vs. 0.1% in February consistent with the improvement above the 50 boom/bust level in the ISM manufacturing index.

Fed officials continue to urge patience before easing. San Francisco Fed President Mary Daly (voter) warned overnight that “the worst thing to do is act urgently when urgency isn't necessary”. Several other Fed officials speak today: Fed Vice Chair Philip Jefferson (2:00pm London), New York Fed President John Williams (5:30pm London), Richmond Fed President Thomas Barkin (voter) (6:00pm London), Fed Chair Jay Powell (6:15pm London), Boston Fed President Susan Collins (9:30pm London).

GBP came under downside pressure on easing UK labour market conditions. The UK unemployment rate rose more than expected by 0.3pts to 4.2% in the three-month to February. However, the unemployment rate is at the Bank of England’s (BOE) medium-term equilibrium level of around 4½% and the claimant count rate is steady at 4%. Moreover, ongoing issues with the sample size of the Labour Force Survey means the unemployment rate estimate should be treated with additional caution.

Importantly, UK wage growth slowed less than forecast in February suggesting the BOE can afford to stay on the sidelines for the time being. Overall regular average weekly earnings (excluding bonuses) printed at 6% y/y (consensus: 5.8%) vs. 6.1% in January. Private sector regular average weekly earnings growth was also 6% y/y in February and tracking higher than the BOE’s Q1 projection of 5.7%. Money market price-in 95% odds of an August BOE rate cut. But sticky nominal wage growth and rising real wages suggest UK interest rate expectations have room to adjust higher in favor of a firmer GBP.

EUR/USD is down near 1.0600 on narrowing EU-US bond yield spreads. The Eurozone’s April ZEW investor expectations survey and February trade balance (both at 10:00am London) are unlikely to generate much financial market volatility.

USD/CAD broke above 1.3800 on broad USD strength. CAD and Canadian bond yields will take their cue today from Canada’s March CPI data (1:30pm London), Bank of Canada Governor Tiff Macklem fireside chat (6:15pm London), and the government’s 2024 budget (9:00pm London). Canada headline CPI inflation is expected to tick-up 0.1pts to 2.9% y/y in March, which would still be in line with Bank of Canada projections (Q1: 2.8%, Q2: 2.9%). Core trim is expected to remain steady at 3.2% y/y, while core median is expected to fall a tick to 3.0% y/y. Overall, inflation is slowing leaving room for the BOC to start easing in June and undermine CAD. Canada’s OIS curve implies 60% odds of a policy rate cut in June, consistent with Governor Macklem’s statement last week that a June rate cut was “in the realm of possibilities”.

AUD/USD and NZD/USD edged lower on broad USD strength and unimpressive Chinese economic activity (see below). Soft inflation in New Zealand (11:45pm London) can further weigh on NZD. Headline CPI is expected to increase by 0.6% q/q driven by higher non-tradeable prices (1.3% q/q). Tradeable CPI is forecast to fall 0.2% q/q in Q1. Year-over-year, headline CPI inflation is projected to ease to near a three-year low of 4% from 4.7% in Q4 2023. The RBNZ Q1 CPI forecasts are 0.4% q/q and 3.8% y/y.

China Q1 GDP growth tops forecast but monthly activity data continue to point at a tepid cyclical economic recovery. The economy grew 1.6% q/q in Q1 (consensus: 1.5%) to be up 5.3% y/y which is line with the government’s 5% target. In March, fixed-asset investments growth exceeded again expectations rising at an annual pace of 4.5% YTD (consensus: 4%). However, annual industrial production and retail sales growth were softer than anticipated at 6.1% YTD (consensus: 6.6%) and 4.7% (consensus: 5.4%), respectively. The property slump remains a big drag on consumer spending. In fact, new home prices are down 2.7% y/y in March, the most since 2015 and used home prices are down a record 5.9% y/y. Bottom line: until China deals with its huge debt overhang (total debt more than 300% of GDP), the country looks set for much weaker growth in the years ahead.