Dollar Flat Ahead of Retail Sales

August 15, 2024

Win Thin

Data highlight will be July retail sales; July CPI was not a market-mover; the Fed remains concerned about the labor market; weekly jobless claims will be reported
U.K. reported Q2 GDP data; Norges Bank delivered a hawkish hold; Israel reports July CPI
Japan reported strong Q2 GDP data; Australia reported strong July jobs data; RBNZ Governor Orr spoke; China reported July IP, retail sales, FAI, and property investment data; Philippines cut rates 25 bp to 6.25%, as expected

The dollar is treading water ahead of retail sales data. DXY is trading flat for the second straight day near 102.554 as CPI data came in largely as expected (see below). NOK is the best major performer after the Norges Bank’s hawkish hold, followed closely by AUD due to strong jobs report in Australia (see below). The yen is little changed near 147.30, sterling is trading higher near $1.2855 after GDP data (see below), and the euro is trading flat near $1.1010. While the Fed is widely expected to cut rates in September, we continue to believe that markets are overreacting to the recent softness in the U.S. data. Looking at the totality of the data, the economy is still growing above trend and suggests the market is once again getting carried away with its pricing for aggressive easing (see below). We continue to believe that the divergence story remains in place and should continue to support the dollar. However, it will likely take weeks for the current market narrative to run its course. Today’s retail sales data will be key.

AMERICAS

Data highlight will be July retail sales. Headline is expected at 0.4% m/m vs. flat in June, while ex-autos is expected at 0.1% m/m vs. 0.4% in June. The so-called control group used for GDP calculations is expected at 0.1% m/m vs. 0.9% in June. There have been some signs of softening in consumption, but we note that personal consumption accelerated in Q2 to 2.3% SAAR vs. 1.5% in Q1. As long as jobs are being created, we believe consumption will hold up.

July CPI was not a market-mover. Headline came in a tick lower than expected at 2.9% y/y vs. 3.0% in June, while core came in as expected at 3.2% y/y vs. 3.3% in June. Headline was the lowest since March 2021. Elsewhere, super core fell two ticks to 4.5% y/y, the lowest since February. Further progress on inflation reinforces the case for a rate cut at the September 17/18 FOMC meeting. However, with super core CPI remaining sticky above 4% y/y, we believe the Fed will remain cautious and cut by only 25 bp. The Cleveland Fed’s Nowcast model forecasts August CPI headline and core at 2.6% y/y and 3.2% y/y, respectively.

The Fed remains concerned about the labor market. Chicago Fed President Goolsbee acknowledged that the recent rise in the unemployment rate could be due to more people entering the labor force but warned that it could also be “an indicator that we’re not settling down at steady-state levels, but moving into something that’s, in the short-run, worse. If that starts to happen, then our emphasis has to be significantly more on the employment side of the mandate.” Goolsbee is one of the leading doves on the FOMC but is not a voter this year. Musalem and Harker speak today.

Still, the Fed is not in any hurry to cut rates. The notion of an intra-meeting cut seems very unlikely and so we continue to see the first cut at the September 17/18 FOMC meeting. A 50 bp cut is possible but will fully depend on the data, with around 40% odds priced in now vs. 60% before the CPI data. The market is still fully pricing in 100 bp of easing by year-end, as well as 200 bp of total easing over the next 12 months. Unless the U.S. economy falls into a deep recession, this rate path still seems unlikely. However, we cannot stand in the way of this dovish narrative until we see more data.

Weekly jobless claims will be reported. With the Fed’s growing focus on the labor market, the weekly claims data have taken on greater significance ahead of the monthly jobs data. Initial claims are expected at 235k vs. 233k last week, while continuing claims are expected at 1.870 mln vs. 1.875 mln last week. Of note, next week’s initial claims data will be for the BLS survey week containing the 12th of the month. There is no Bloomberg consensus yet for August NFP, but its whisper number stands at 132k vs. 114k actual in July.

Regional Fed surveys for August start rolling out. Empire manufacturing is expected at -6.0 vs. -6.6 in July, while Philly Fed manufacturing is expected at 5.2 vs. 13.9 in July. July IP is expected at -0.3% m/m vs. 0.6% in June. July import/export prices, June business inventories, August NAHB housing market index, and June TIC data will also be reported today.

The U.S. economy overall remains solid. Yes, there are pockets of weakness, but GDP grew 2.8% SAAR in Q2. For Q3, the Atlanta Fed’s GDPNow model is tracking 2.9% SAAR and will be updated today after the data. The New York Fed’s Nowcast model is tracking Q3 growth at 2.2% SAAR and will be updated tomorrow, while its first estimate for Q4 will come at the end of August.

EUROPE/MIDDLE EAST/AFRICA

U.K. reported Q2 GDP data. Growth came in as at 0.6% q/q vs. 0.7% in Q1, while the y/y rate also came in as expected at 0.9% vs. 0.3% in Q1. Private consumption was weaker than expected at 0.2% q/q, but this was offset in part by stronger than expected government spending at 1.4% q/q. Business investment and net exports were also drags on growth. Monthly June data reported at the same time suggest a loss of momentum as the quarter closed out. GDP was flat m/m, IP rose 0.8% m/m, services fell -0.1% m/m, and construction rose 0.5% m/m. Retail sales will be reported tomorrow but so far this week, the data suggest the BOE will continue cutting rates to support the economy.

Norges Bank delivered a hawkish hold. It kept rates steady at 4.5%, as expected, but rather than laying the groundwork for a rate cut, the bank said that rates “will likely be kept at the current level for some time ahead.” It added that policymakers were “particularly concerned with developments in the krone exchange rate and the potential implications for inflation” as “the krone has depreciated and is weaker than assumed.” Forecasts from the June meeting showed that the policy rate would likely be kept at 4.50% through year-end before gradually being reduced from Q1 2025. Updated macro forecasts will come at the next meeting September 19. While a cut then isn’t expected, the bank is likely to adjust its forward guidance to show a more dovish rate path. As it is, the market is pricing in the first cut in December and 125 bp of total easing over the next 12 months.

Israel reports July CPI. Headline is expected at 3.1% y/y vs. 2.9% in June. If so, it would be the second straight month of acceleration to the highest since November and would move back above the 1-3% target range. At the last meeting July 8, Bank of Israel left rates steady at 4.5% and said it expects the Gaza conflict to wind down in early 2025. The research department sees the policy rate at 4.25% in Q2 2025, with the bank noting that “Due to the revised assumption regarding the duration of the fighting, our assessment is that the risk premium, which rose due to the war, will decline more gradually than we assumed. A higher interest rate will be necessary in order to stabilize inflation.” Next policy meeting is August 28, and another hold seems likely. The swaps market is pricing in 75 bp of total easing over the next 12 months that would see the policy rate bottom near 3.75%.

ASIA

Japan reported strong Q2 GDP data. GDP growth came in at 0.8% q/q vs. 0.6% expected and a revised -0.6% (was -0.5%) in Q1, while the SAAR came in at 3.2% vs. 2.3% expected and a revised -2.3% (was -1.8%) in Q1. Private consumption and business spending were both stronger than expected at 1.0% q/q and 0.9% q/q, respectively. The bounce is in line with the recovery in high-frequency data. However, some of the forward-looking indicators have softened, making the BOJ’s hawkish hike a bit riskier.

Australia reported strong July jobs data. There were 58.2k jobs added vs. 20.0k expected and a revised 52.3k (was 50.2k) in June. The mix was good, with 58.2k full-time jobs added offset by -2.3k part-time jobs lost. The unemployment rate still rose a tick to 4.2% on a higher participation rate of 67.1% but remains near the lower end of the RBA’s estimated full employment range of 4.0-5.75%. Overall, the labor market remains relatively robust and should curb RBA easing expectations.

RBNZ Governor Orr spoke. He stressed that “We want to get there at a careful and measured pace to ensure that inflation expectations remain anchored at the 2% target rate. That is our single focus.” Orr was upbeat on the growth outlook, noting that despite near-term weakness, “There are many things that are pointing in the right positive direction for economic growth. We see positive economic growth coming and we can be easing interest rates. So we have growth without the inflation.” The swaps market is pricing in 200 bp of easing over the next 12 months, which seems a bit too aggressive and is probably why Orr is pushing back a bit.

China reported July IP, retail sales, FAI, and property investment data. IP came in as expected at 5.9% YTD vs. 6.0% in June, sales came in as expected at 3.5% YTD vs. 3.7% in June, FAI came in three ticks lower than expected at 3.6% YTD vs. 3.9% in June, and property investment came in three ticks lower than expected at -10.2% YTD vs. -10.1% in June. With the economy still facing headwinds, we expect further stimulus measures in the coming months.

China also reported weak home prices. Both new and used home prices continued to fall both m/m and y/y in July despite government efforts to prop up the property sector. With the glut of housing likely to persist, prices should continue to fall.

Philippines central bank cut rates 25 bp to 6.25%, as expected. Governor Remolona said “It’s one move. We may need further moves in the same direction” and added that another 25 bp cut was possible in either October or December. It’s a risky start to the easing cycle, as inflation accelerated to 4.4% y/y in July, the highest since October and back above the 2-4% target range. Remolona said “We’re somewhat more confident in the inflation numbers coming down than in the GDP numbers going up.” The swaps market is pricing in 175 bp of total easing over the next 12 months.

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