Dollar Remains Soft Ahead of Retail Sales Data

April 14, 2023
  • March retail sales data will be the highlight; March inflation data sent a mixed message; weekly jobless claims are worth discussing; reports suggest House Speaker McCarthy will propose a plan next week that would suspend the debt ceiling for a year in return for strict limits on spending
  • The ECB hawks remain vocal; ECB tightening expectations have edged higher; outgoing Bank of England MPC member Tenreyro speaks later today; Sweden reported softer March CPI data; Egypt central bank Governor Abdalla sounded dovish
  • The Monetary Authority of Singapore kept policy steady

The dollar is soft ahead of the retail sales data. DXY is down for the fourth straight day and trading just below 101. The clean break below 102 last week sets up a test of the February low near 100.82. After that is the late April 2022 low near 99.818. The euro is trading at a new cycle high near $1.1075 and remains on track to test the March 2022 high near $1.1185. Sterling is trading flat near $1.2515 but remains on track to test the May 2022 high near $1.2665. USD/JPY remain heavy and is trading near 132.45. Bottom line: the dollar may see some safe haven bid from time to time but until U.S. yields recover, the dollar is likely to remain under pressure near-term. While last week’s jobs data was dollar-supportive, this week’s inflation was largely dollar-negative. Today‘s retail sales data will be key in setting the dollar’s near-term direction.

AMERICAS

March retail sales data will be the highlight. Headline is expected at -0.4% m/m vs. -0.4% in February and ex-autos is expected at -0.4% m/m vs. -0.1% in February. The so-called control group used for GDP calculations is expected at -0.5% m/m vs. 0.5% in February. With the labor market showing some signs of softness, will consumption also soften? Of note, the Atlanta Fed’s GDPNow model is currently tracking Q1 GDP growth at 2.2% SAAR, up from 1.5% previously. Next model update comes today after the data.

March inflation data sent a mixed message. Headline CPI came in at 0.1% m/m and 5.0% y/y vs. 0.4% m/m and 6.0% y/y in February, while core came in at 0.4% m/m and 5.6% y/y vs. 0.5% m/m and 5.5% y/y in February. Core CPI remains sticky and suggests upside risks to core PCE and super core PCE to be reported April 28. PPI told a somewhat better story. Headline PPI came in at -0.5% m/m and 2.7% y/y vs. a revised 0.0% (was -0.1%) m/m and 4.9% (was 4.6%) y/y in February, while core PPI came in at -0.1% m/m and 3.4% y/y vs. a revised 0.2% (was 0.0%) m/m and 4.8% (was 4.4%) y/y in February. As we know, firms have been able to pass on higher costs to the consumer when PPI was rising. Will they pass on lower costs now that PPI is falling? Stay tuned.

Fed tightening expectations remain little changed. WIRP suggests around 70% odds of 25 bp hike at the May 2-3 meeting, about where they started this week and up from 50% at the start of last week. After that, it’s still all about the cuts. Two cuts by year-end are still priced in. The FOMC minutes for the March 21-22 showed that Fed researchers were predicting a mild recession in H2 and yet the Fed still hiked rates 25 bp. Does that sound like a central bank that will cut at the first sign of weakness in the economy? We don’t think so. Goolsbee and Waller speak today.

Weekly jobless claims are worth discussing. Initial claims rose to 239k for the week ending April 8, while the 4-week moving average rose to 240k. Continuing claims came in at 1.81 mln. The claims data have been trending higher in recent weeks and are the first real signs of softness in the labor market. Of note, next week’s initial claims will be for the BLS survey week containing the 12th of the month.

Preliminary April University of Michigan consumer sentiment will also be reported. Headline is expected to rise a tick to 62.1. Elsewhere, 1-year inflation expectations are seen rising a tick to 3.7% while 5- to 10-year expectations are seen steady at 2.9%. March import/export prices and IP will also be reported. IP is expected at 0.2% m/m vs. 0.0% in February, with manufacturing expected at -0.1% m/m vs. 0.1% in February.

Reports suggest House Speaker McCarthy will propose a plan next week that would suspend the debt ceiling for a year in return for strict limits on spending. The plan reportedly calls for a vote in the House in late May to suspend the debt ceiling until May 2024. In return, the plan calls for strict limits on non-defense discretionary spending. At this point, the details are not yet important as this should be seen as an opening gambit in negotiations with President Biden and his Democratic colleagues in Congress. There will be lots of negotiations ahead as President Biden has called for an unconditional increase of the $31.4 trin debt ceiling whilst saying he would discuss a separate budget agreement with McCarthy. Still, the fact that negotiations are about to begin in earnest is a positive sign.

EUROPE/MIDDLE EAST/AFRICA

The ECB hawks remain vocal. Holzmann said that a 50 bp hike “could be in the ballpark next time, what happens afterward depends as always on the conditions. The persistence of core inflation is quite definitely one of the elements which will have to be taken into account, because core inflation is a great predictor of future headline inflation.” Kazaks said “At some point one has to start slowing down because we want to find what is the appropriate terminal point during this cycle and of course it may involve both smaller steps or taking a pause at some point, but at least in my books I don’t see any reason to slow down any time soon in terms of interest-rate increases, because inflation does remain very high.” Vasle noted that “The options for May are between 25 and 50 bp. It’s not necessary to decide now already as the size of the next step will depend on the data - including on bank lending, growth and inflation.” Noted hawk Nagel speaks later today.

ECB tightening expectations have edged higher. The next policy meeting is May 4 and WIRP suggests nearly 25% odds of a 50 bp hike then, up from zero at the start of the week. After that, another 25 bp hike is priced in for September or October that would see the deposit rate peak near 3.75%, up from 3.5% at the start of this week.

Outgoing Bank of England MPC member Tenreyro speaks later today. Her second three-year term ends in July but reports have recently emerged that the Treasury will soon announce her replacement. Tenreyro has become one of the leading doves on the MPC and so her replacement could lead to a shift in the hawk-dove balance. Meanwhile, BOE tightening expectations have edged higher. The next policy meeting is May 11 and WIRP suggests around 80% odds of a 25 bp hike, with another 25 bp hike almost priced in September 21. As a result, the peak policy rate is seen near 4.75% vs. between 4.50-4.75% at the start of this week. Yesterday, Chief Economist Pill said inflation is likely to drop sharply this year despite the “material upside surprise” for February. March CPI data will be reported next Wednesday, with headline expected at 9.8% y/y vs. 10.4% in February and core expected at 6.0% y/y vs. 6.2% in February.

Sweden reported softer March CPI data. Headline came in at 10.6% y/y vs. 11.0% expected and 12.0% in February, CPIF came in at 8.0% y/y vs. 8.3% expected and 9.4% in February, and CPIF ex-energy came in at 8.9% y/y vs. 9.1% expected and 9.3% in February. Targeted CPIF is the lowest since last July but remains well above the 2% target. Of note, the drop in the y/y rates is due largely to high base effects from the Russian invasion of Ukraine last year. The m/m gains have eased as CPI came in at 0.6% vs. 1.1% in February, CPIF came in at 0.4% vs. 0.9% in February, and CPIF ex-energy came in at 0.6% vs. 1.5% in February, but remain way too high to see a return to target anytime soon. At the last policy meeting February 9, the Riksbank hiked rates 50 bp to 3.0% and delivered several other hawkish measures whilst noting “Inflation is far too high and has continued to rise. The policy rate will probably be raised further during the spring.” Forward guidance shifted more hawkish as the policy rate was seen peaking at 3.33% in Q4 2024 and staying there through Q1 2026. WIRP suggests another 50 bp hike to 3.5% is almost fully priced in for the next meeting April 26, as is a 25 bp hike to 3.75% at the June 29 meeting.

Egypt central bank Governor Abdalla sounded dovish. While he said “we’ll not hesitate to do more, but we need to be very careful. The interest rate is not the only tool.” Abdalla added that “A lot of our inflation is imported and a lot of it is due to supply problems. Not only supply prices but supply issues including a backlog that has resulted from some previous regulations. And this in itself is not and will not be addressed by interest rates.” Back in December, the central bank set new inflation target ranges of 5-9% by Q4 2024 and 3-7% by Q4 2026. CPI rose 32.7% y/y in March. With the policy rate at 18.25%, the real rate remains deeply negative and more hikes are needed if those inflation targets are to remain credible. So far this year, the bank delivered a dovish surprise February 2 and kept rates steady at 16.25% and then hiked rates 200 bp to 18.25% March 30. Next meeting is May 18 and another large hike is needed.

ASIA

The Monetary Authority of Singapore kept policy steady. This was the first hold after five straight moves to tighten within a year, including two intra-meeting. It noted that “Singapore’s GDP growth is projected to be below trend this year. With intensifying risks to global growth, the domestic economic slowdown could be deeper than anticipated. While inflation is still elevated, MAS’ five successive monetary policy tightening moves since October 2021 have tempered the momentum of price increases. The effects of MAS’ monetary policy tightening are still working through the economy and should dampen inflation further.” Furthermore, “With imported inflation turning more negative and core inflation expected to ease materially by end-2023, MAS has assessed that the current appreciating path of the S$NEER policy band is sufficiently tight and appropriate for securing medium-term price stability.” Singapore reported Q1 GDP at -0.7% q/q vs. -0.1% expected and 0.1% in Q4, while the y/y rate came in at 0.1% vs. 0.6% expected and 2.1% in Q4.

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