Dollar Consolidates Ahead of Retail Sales Data

February 15, 2024

Win Thin

Retail sales data will be the highlight; financial conditions continue to loosen; growth remains strong in Q1; regional Fed surveys for February start rolling out; TIC data will also be closely watched; Chile central bank minutes will be released
U.K. Q4 GDP data came in soft; we doubt the BOE will be in a rush to move to less restrictive policy settings; ECB President Lagarde did not offer material new insights on the policy outlook
Japan reported soft Q4 GDP data; the BOJ will not be in a rush to normalize policy anytime soon; Australia reported soft January jobs data; RBNZ Governor Orr speaks this afternoon; Philippine kept rates steady at 6.5%, as expected

The dollar continues to consolidate ahead of retail sales data. DXY is trading lower for the second straight day near 104.613 after trading at a new cycle high yesterday near 104.976. The euro is trading flat near $1.0735, while sterling is underperforming and trading lower near $1.2545 on soft GDP data (see below). USD/JPY is trading heavy near 150 despite soft GDP data (see below), but we believe the pair remains on track to test the November 13 high near 151.90. When all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon. The data continue to come in firm while Fed officials remain cautious about easing. We still believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should see further gains after this current period of consolidation.

AMERICAS

Retail sales data will be the highlight. Consensus sees headline at -0.2% m/m vs. 0.6% in December and ex-autos at 0.2% m/m vs. 0.4% in December. The so-called control group used for GDP calculations is expected at 0.2% m/m vs. 0.8% in December. Note that the y/y rates continued to accelerate in December, and we think that trend is likely to continue in early 2024.

Financial conditions continue to loosen. The Chicago Fed’s measure of financial conditions loosened for the 16th straight week to the loosest since January 2022. As we’ve been pointing out for a while now, there is simply nothing holding the economy back right now and so above trend growth is likely to persist in Q1. Waller and Bostic speak today and are likely to lean on the hawkish side.

Indeed, growth remains strong in Q1. The Atlanta Fed’s GDPNow model is tracking Q1 growth at 3.4% SAAR vs. the first estimate of 3.0%. The early estimates are often volatile, and the next update comes today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 3.3% SAAR and will be updated tomorrow.

Regional Fed surveys for February start rolling out. Empire and Philly Fed manufacturing kick things off and are expected at -12.5 and -8.1, respectively. Both would be an improvement from January. New York Fed services index will be reported tomorrow.

December TIC data will also be closely watched. The TIC data should show that while China continues to lighten up on its holdings of U.S. Treasuries, underlying global demand for USD-denominated assets remains robust.

Chile central bank minutes will be released. At the January 31 meeting, the bank cut rates 100 bp to 7.25%, as expected. The vote was 4-1, with the dissent in favor of a larger 125 bp move. Since then, CLP has been the worst performer in EM by far. After the first 100 bp cut in July led to peso weakness, the bank dialed it back to 75 bp in September, 50 bp in October, and 75 bp in December. If peso weakness continues, the bank may have to dial it back again at the next meeting April 2. The swaps market is pricing in 300 bp of easing over the next 12 months that would see the policy rate bottom at 4.25%.

EUROPE/MIDDLE EAST/AFRICA

U.K. Q4 GDP data came in soft. GDP contracted -0.3% q/q vs. -0.1% expected and actual in Q3. These were the first back-to-back quarters of contraction since Q1 and Q2 2020. Private consumption contracted -0.1% q/q vs. 0.1% expected and a revised -0.9% (was -0.5%) in Q3, while government spending contracted -0.3% q/q vs. -0.2% expected and a revised 1.1% (was 0.8%) in Q3. GFCF was the lone bright spot, rising 1.4% q/q vs. flat expected and a revised -1.4% (was -1.6%) in Q3. Net exports subtracted from growth as exports fell -2.9% q/q and imports fell -0.8% q/q.

Nonetheless, we doubt the BOE will be in a rush to move to less restrictive policy settings. This is GBP supportive, particularly versus EUR. First, leading indicators point to a recovery in U.K. economic activity in Q1. Second, UK labor market conditions remain tight while the improving U.K. inflation backdrop will boost real earnings growth and underpin consumer spending. MPC member Green takes part in a fireside chat today. Green backed keeping interest rates on hold in February after dissenting in favor of tighter policy at the previous three MPC meetings. Later, hawkish MPC member Mann speaks on a panel titled “Labor, investment and technology: assess the drivers of productivity growth.” Mann has voted since the August meeting to raise the bank rate by 25 bp to 5.50%. Of note, he first cut is now priced in for August and only 75 bp of total easing is seen in 2024. Compare this to the start of this year, when markets saw the first cut in June and nearly 125 bp of total easing in 2024.

ECB President Lagarde did not offer material new insights on the policy outlook. Lagarde suggested again that the ECB will place lots of weight on the outcome of upcoming eurozone wage negotiations. Many wage agreements will be renewed in the early months of 2024 and the ECB’s forward-looking wage trackers point to some cooling of wage pressures. As such, the bar for the ECB to keep rates steady in April or June is high and remains a drag for EUR. The euro ignored the narrower eurozone trade surplus. The surplus fell by EUR2 bln in December 2023 to EUR13 bln, consistent with a slower improvement in the current account surplus, which totaled EUR231 bln or 1.6% of GDP in the twelve months to November. A speech by Chief Economist Lane is the next ECB highlight. Nagel also speaks. Market pricing for the first cut has moved to June vs. April previously. Also, 125 bp of total easing is priced in over the next 12 months vs. 150 at the start of the month.

ASIA

Japan reported soft Q4 GDP data. GDP contracted -0.1% q/q vs. 0.2% expected and a revised -0.8% (was -0.7%) in Q3. These were the first back-to-back quarters of contraction since Q3 and Q4 2018. Private consumption contracted -0.2% q/q vs. flat expected and a revised -0.3% (was -0.2%) in Q3, while business spending contracted -0.1% q/q vs. 0.2% expected and a revised -0.6% (was -0.4%) in Q3. Inventories were neutral for growth, as expected, after subtracting -0.5 ppt in Q3, while net exports added 0.2 ppt to growth vs. 0.3 ppt expected and was revised to be neutral for growth (was -0.1 ppt) in Q3.

The BOJ will not be in a rush to normalize policy anytime soon. The recent weakness in domestic demand is likely to persist until wage growth picks up, which remains a major factor in the BOJ’s reaction function. If the spring wage negotiations imply increased wage pressures, liftoff is still seen as likely in June.

Australia reported soft January jobs data. Employment rose only 500 vs. 25.0k expected and a revised -62.7k (was -65.1k) in December. The unemployment rate rose a tick more than expected to 4.1% vs. 3.9% in December and is the highest since January 2022. Changing seasonal dynamic within the labor market may have affected the labor force survey, as January is a popular month for people to take annual leave. Regardless, the unemployment rate is still well within the RBA’s estimated full-employment range (4.0-5.75%) and justifies the RBA not ruling out further increase in interest rates. Still, the market sees no more hikes and the first cut is 95% priced in for August.

RBNZ Governor Orr speaks this afternoon. His speech will be about “the changing drivers of inflation over the past couple of years and the shift from transitory to more stubborn underlying inflation.” It will be very interesting to see if his tone validates the recent call from a major New Zealand bank for a 25 bp hike to 5.75% this month followed by another 25 bp hike to 6.0% in April. It’s worth recalling that at the last meeting November 29, the bank delivered a hawkish hold as the bank discussed a rate hike before deciding on no change. The expected rate path showed an end-2024 policy rate of 5.7% vs. 5.5% previously, suggesting high odds of one last hike. In underscoring the higher for longer theme, the RBNZ saw an end-2025 policy rate of 4.9% vs. 4.5% previously while the first cut was forecast around Q2 2025 vs. Q1 2025 previously. The market is now pricing in 25% odds of a hike February 28 and those odds rise to 45% April 10 and over 50% May 22. However, the market is not pricing in any odds of a second hike.

Philippine central bank kept rates steady at 6.5%, as expected. The tone tilted less hawkish as the bank noted “The risks to the inflation outlook have receded but remain tilted toward the upside” and added that it was “appropriate to keep policy settings unchanged in the near term.” Despite the less hawkish tone, the swaps market is pricing in steady rates over the next three months followed by 50 bp of easing over the subsequent six months.

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