Dollar Remains Soft Despite Strong Retail Sales Data

November 16, 2022

Win Thin

October retail sales came in firm; U.S. yields remain subdued ahead of the data; Canada reported mixed October CPI data
It appears that the missile hit in Poland was a tragic accident; U.K. reported October CPI data; ECB warned of rising risks for banks, governments, and households; ECB tightening expectations have been pared back
Japan reported soft September core machine orders

The dollar remains under pressure despite strong retail sales data. DXY is down for the second straight day near 106.157 and appears on track to test of the August 10 low near 104.636. The euro is testing the 200-day moving average near $1.0425 and a break above would set up a test of the June 27 high near $1.0615. Cable is trading just below $1.19 after testing $1.20 yesterday, where a break above would set up a test of the August 15 high near $1.2150. The 200- day moving average comes in near $1.2240. USD/JPY remains heavy and is hovering near 139.55. Until the data says otherwise, near-term dollar weakness seems likely.

AMERICAS

October retail sales came in firm. Headline came in at 1.3 % m/m vs. 1.0% expected and a flat reading in September, while sales ex-autos came in at 1.3% vs. 0.5% expected and 0.1% in September. The so-called control group used for GDP calculations came in at 0.7% m/m vs. 0.3% expected and a revised 0.6% (was 0.4%) in September. Of note, the Atlanta Fed GDPNow model is currently tracking 4.0% SAAR, up from 3.6% previously. The next model update will come later today. Of note, University of Michigan consumer sentiment fell sharply to 54.7 in November, reversing four straight months of improvement from the 50.0 low in June but consumption continues to hold up.

October IP waws soft. It came in at -0.1% m/m vs. 0.1% expected and a revised 0.1% (was 0.4%) in September. November NAHB housing index will be reported later today and is expected at 36 vs. 38 in October. If so, it would be the lowest since May 2020. September business inventories and September TIC data will also be reported later.

U.S. yields remain subdued after the data. The U.S. 2-year yield is trading near 4.34%, just above the recent low near 4.29% last Thursday. The 10-year yield is trading near 3.72%, below the recent low near 3.81% last Thursday. Yields are likely to continue probing the downside until the data say otherwise. Today’s retail sales report is a good start but we may need a lot more to get the market’s attention. A 50 bp hike December 14 is still priced in, as is a peak policy rate near 5.0%.

Fed speakers remain plentiful. Williams, Barr, and Waller speak today. Yesterday, Bostic wrote “There are glimmers of hope. I will need to see indicators of broad-based easing of inflation.” He added that “we are not there now, and so I anticipate that more rate hikes will be needed.” Elsewhere, Harker said “In the upcoming months, in light of the cumulative tightening we have achieved, I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance. I expect we will hold at a restrictive rate for a while to let monetary policy do its work.” Lastly, Barr testified to the Senate that “I think that it is the case that we are going to see significant softening in the economy. Inflation is far too high.”

Canada reported mixed October CPI data. Headline remained steady as expected at 6.9%, but core common came in at 6.2% y/y vs. 5.9% expected and a revised 6.2% (was 6.0%) in September. Still, overall price pressures appear to have peaked. Bank of Canada next meets December 7 and a 25 bp hike to 4.0% is expected. WIRP suggests 35% odds of a larger 50 bp move. Of note, the swaps market is pricing in a peak policy rate near 4.5%, down from 4.75% in late October.

EUROPE/MIDDLE EAST/AFRICA

It appears that the missile hit in Poland was a tragic accident. NATO, U.S. and Polish officials all believe it was unintentional and most likely a Ukrainian air defense missile. As a result, the safe haven bid for the dollar has evaporated and it’s back under pressure.

The U.K. reported October CPI data. Headline came in at 11.1% vs. 10.7% expected and 10.1% in September, core came in at 6.5% y/y vs. 6.4% expected and 6.5% in September, and CPIH came in at 9.6% y/y vs. 9.3% expected and 8.8% in September. It’s hard for us to get positive on sterling when stagflation is upon us in the U.K.

Bank of England tightening expectations are still adjusting. WIRP suggests a 50 bp hike December 15 is priced in, with 50% odds of a larger 75 bp hike, up from 35% at the start of this week but down from over 60% at the start of last week. The swaps market is still pricing in 150 bp of tightening over the next 12 months that would see the policy rate peak near 4.5%, down from 4.75% at the start of this week and down sharply from 6.25% right after the mini-budget in late September. There are several key BOE speakers this week. Bailey testifies before Parliament today.

The ECB warned in its Financial Stability Review of rising risks for banks, governments, and households. It warned that high inflation is hurting households’ ability to service debts, while the worsening growth outlook is likely to weigh on corporate profits. The bank also warned of rising risks to public finances due to increased spending and borrowing to help lessen the impact of the energy crisis. Guindos noted “People and firms are already feeling the impact of rising inflation and the slowdown in economic activity. Our assessment is that risks to financial stability have increased, while a technical recession in the euro area has become more likely.” He added that “It is very difficult to have financial stability without price stability.”

ECB tightening expectations have been pared back. WIRP suggests another 75 bp is about 30% priced in for December 15 vs. 45% at the start of this week and fully priced in after the October decision, while the swaps market is pricing in a peak policy rate between 2.75-3.0% vs. 3.5-3.75% after the October decision. We think there is still room for ECB tightening expectations to fall further and we stand by our call that the ECB will pivot and cut rates before the Fed does. Villeroy, Lagarde, and Panetta speak today.

ASIA

Japan reported soft September core machine orders. Orders came in at 2.9% y/y vs. 8.0% expected and 9.7% in August. This was the weakest since October 2021 and continues the slowing trend. This comes after weaker than expected Q3 GDP readings and of course bodes ill for growth going forward. As such, it’s no surprise that Japan policymakers remain cautious about removing stimulus too soon.

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