Dollar Flat Ahead of Retail Sales and PPI

March 14, 2024

Win Thin

There’s been some Fed repricing after the CPI data; retail sales data will be the highlight; Q1 growth remains robust; PPI is unlikely to be much of a market mover; financial conditions remain loose
The ECB doves have thrown in the towel with regards to an April cut; the ECB concluded the review of its operational framework for implementing monetary policy; Sweden February CPI cooled
Iron ore prices continue to slide

The dollar is still treading water ahead of retail sales and PPI data. DXY is trading flat near 102.828 and has given up much of its post-CPI gains. The euro is trading lower near $1.0940 while sterling is trading higher near $1.2815. USD/JPY is trading flat near 147.80 but is likely to become more volatile as markets continue to debate possible BOJ liftoff next week. We remain frustrated by the current dollar weakness. The U.S. data continue to come in mostly firmer and despite Powell’s dovish comments last week, most Fed officials remain very cautious about easing too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should recover after this current period of weakness. This week’s inflation and retail sales data may be a spark for that move.

AMERICAS

There’s been some Fed repricing after the CPI data. There is no chance that the Fed cuts rates next week. Looking ahead, odds of a May cut are now below 15% while odds of a June cut are below 75%. Furthermore, markets are basically back to matching the Fed's outlook for three cuts this year. The momentum in the U.S. economy remains pretty strong, but a lot can happen between now and May or June that could impact boost those odds. A couple of soft CPI prints would change things but as we pointed out earlier this week, low base effects suggest upside risks for y/y inflation over the next 3-4 months. Rather, it would probably take some weakness in the real economy to have an impact on Fed easing expectations, perhaps from some further softening of the labor market and/or weakness in consumption. Today’s retail sales data will be important.

February retail sales data will be the highlight. Headline is expected at 0.8% m/m vs. -0.8% in January, while ex-autos is expected at 0.5% m/m vs. -0.6% in January. The so-called control group used for GDP calculations is expected at 0.4% m/m vs. -0.4% in January. It appears that most analysts share our sentiment that the January weakness was largely weather-related, as February is clearly expected to bounce back rather nicely.

Q1 growth remains robust. The Atlanta Fed’s GDPNow model is currently tracking Q1 growth at 2.5% SAAR and will be updated today after the data. January business inventories will also be reported. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 2.1% SAAR and Q2 growth at 2.5% SAAR and will be updated tomorrow.

February PPI is unlikely to be much of a market mover. Headline is expected at 1.2% y/y vs. 0.9% in January, while core is expected to fall a tick to 1.9% y/y. Keep an eye on PPI services ex-trade, transportation, and warehousing. This measure feeds into the calculation of the policy relevant PCE inflation. This component remains way too high, having picked up to 4.1% y/y in January vs. 3.9% in December.

Financial conditions remain loose. After tightening modestly over the course of four straight weeks from late January through late February, the Chicago Fed’s measure of financial conditions has loosened three straight weeks through last week and are back to being the loosest since February 2022.

Weekly jobless claims will also be reported. Initial claims are expected at 218k vs. 217k last week, while continuing claims are expected at 1.905 mln vs. 1.906 mln last week. While initial claims remain low, continuing claims have been edging higher. Of note, next week’s initial claims reading will be for the BLS survey week containing the 12th of the month.

EUROPE/MIDDLE EAST/AFRICA

The ECB doves have thrown in the towel with regards to an April cut. ECB Governing Council member Stournaras acknowledged that “We will have only little new information before the April meeting, especially on wages at the start of 2024 - but we will get a lot more data before the June meeting. I think to cut rates already in April we will need to see the economy crashing and I don’t expect that.” However, he added that “It is appropriate to do two rate cuts before the summer break, and four moves throughout the year seem reasonable.” This timetable would suggest the ECB cuts rates June 6 and July 18 before the summer break. After the break, the ECB meets September 12, October 17, and December 12. Updated macro forecasts will come at the June, September, and December meetings. De Cos, Lane, Schnabel, Knot, Guindos, and Stournaras speak today.

Yesterday, the ECB concluded the review of its operational framework for implementing monetary policy that began in December 2022. The changes will affect how ECB liquidity will be provided and has no monetary policy implications. The purpose of the operational framework was to steer short-term money market rates more closely in line with the ECB’s monetary policy decisions. President Lagarde said that the review acknowledges the “significant changes in the financial system and monetary policy in recent years. The framework will ensure that our policy implementation remains effective, robust, flexible and efficient.”

Sweden February CPI cooled. Headline came in at 4.5% y/y vs. 4.7% expected and 5.4% in January, CPIF came in at 2.5% vs. 2.8% expected and 3.3% January, and CPIF ex-energy came in at 3.5% vs. 3.6% expected and 4.4% in January. CPIF almost totally reversed last month’s spike from 2.3% in December and is moving closer to the 2% target. At the last policy meeting February 1, the Riksbank kept rates steady at 4.0% but warned that “the policy rate probably can be cut sooner than was indicated in the November forecast.” No change is expected at the next meeting March 27, but we believe data reinforces the case for a rate cut May 8 or June 27. Sweden’s OIS curve implies an 80% probability of a 25 bp cut over the nextthree months.

ASIA

Iron ore prices continue to slide. Prices fell another 2% today to $103.20, bringing the total drop from the January peak to nearly 27%. Weakness in the mainland China economy is the main driver and this is set to continue. The $100 per ton level is coming into view and clean break below $104.16 sets up a test of the May 2023 low near $81.95. This is a huge negative terms of trade shock for Australia and should weigh on AUD. Many industrial commodity prices are trading around where they were in December 2022, when China finally reopened.

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