Dollar Remains Under Pressure Ahead of CPI and Retail Sales

May 15, 2024
  • Fed Chair Powell stuck to the script; April CPI will be the highlight; PPI readings were mixed; retail sales will also be very important; regional Fed surveys for May will start rolling out
  • ECB officials are teeing up a June rate cut; eurozone reported firm March IP; Sweden reported soft April CPI; Riksbank published minutes to the May 7 meeting
  • Australia reported softer Q1 wages; China is reportedly considering a plan to have local governments buy millions of unsold homes

The dollar remains under pressure ahead of CPI and retail sales data. DXY is trading lower for the third straight day near 104.855 after giving up earlier gains. DXY saw an outside down day yesterday that points to further losses. Indeed, clean break below 104.887 sets up a test of the April low near 103.880. Whether the dollar rally can resume will depend solely on key U.S. data today (see below). The euro is trading higher near $1.0825 while sterling is trading higher near $1.2610. USD/JPY is trading lower near 155.85 as higher JGB yields finally bite. We believe the backdrop of persistent inflation and robust growth in the U.S. remains in place, which the data today are expected to underscore. As such, we look for the dollar to eventually recover. Powell did the dollar no favors yesterday as he simply rehashed his dovish post-decision press conference from May 1 (see below).


Fed Chair Powell stuck to the script. Powell pointed out the economy has been performing very well lately and but reiterated that the confidence in inflation moving back down is lower than it was earlier this year. Powell acknowledged that “It looks like it will take longer for us to become confident that inflation is coming down to 2% over time” and added he does not know if inflation will be persistent. Powell emphasized again that it’s unlikely that the next policy rate move will be a hike, adding “We think that it’s probably a matter of just staying at that stance for longer.” This is pretty much a rehash of his May 1 post-decision press conference, which was widely viewed as dovish given the current circumstances. Kashkari and Bowman speak today.

April CPI will be the highlight. Headline is expected to fall a tick to 3.4% y/y, while core is expected to fall two ticks to 3.6% y/y. Keep an eye on super core, which accelerated to 4.8% y/y in March, the highest since April 2023. Of note, the Cleveland Fed’s Nowcast model sees headline at 3.5% y/y and core at 3.7% y/y. Looking ahead, the model sees May headline at 3.5% y/y and core at 3.6% y/y, which suggests inflation will remain sticky. The big issue for the inflation outlook is whether producers can pass rising costs on to consumers. Interestingly, anecdotal evidence from the April Fed Beige Book suggested firms’ ability to pass on cost increases had weakened considerably in recent months. Stay tuned.

April PPI readings were mixed. Headline came in as expected at 2.2% y/y vs. a revised 1.8% (was 2.1%) in March, while core came in a tick higher than expected at 2.4% y/y vs. a revised 2.1% (was 2.4%) in March. The market focused more on the downward revisions to March, but we instead focused on the fact that PPI inflation is for the most part still accelerating. Of particular concern, PPI ex-trade, transportation, and housing feeds into PCE calculations and this measure accelerated to 4.4% y/y vs. 4.2% in March and is the highest since August.

April retail sales will also be very important. Headline is expected at 0.4% m/m vs. 0.7% in March, while ex-autos is expected at 0.2% m/m vs. 1.1% in March. The so-called control group used for GDP calculations is expected at 0.1% m/m vs. 1.1% in March. University of Michigan reported sharply lower consumer sentiment last week and so the sales data could confirm whether or not this is translating into weaker consumption. Overall, we believe consumer spending remains resilient, supported by a robust labor market and positive real wage growth.

Q2 growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q2 growth at 4.2% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking 2.2% SAAR and will be updated Friday. Its initial read for Q3 growth will be released in early June.

Regional Fed surveys for May will start rolling out. Empire manufacturing kicks things off today and is expected at -10.0 vs. -14.3 in April. New York Fed services and Philly Fed manufacturing will be reported tomorrow, with the latter expected at 8.0 vs. 15.5 in April.

Housing data will be closely watched. May NAHB housing market index is expected to fall a point to 50. If so, it would be the first drop since November. April building permits and housing starts will be reported tomorrow and are expected at 0.9% m/m and 7.5% m/m, respectively.


European Central Bank officials are teeing up a June rate cut. Despite the lack of any forward guidance beyond June, cuts are largely priced in for September and December. Knot said “We will have new projections, and I’m confident again that if they confirm the picture as I just sketched it, that June will be a good opportunity to make a first move in removing restriction.” Villeroy said “As we have sufficient confidence, we will very probably begin cutting central-bank rates, doubtless at our meeting at the start of June.” Muller said a cut in June is “very probable” but added that rate cuts over the rest of the year “are more complicated.”

Eurozone reported firm March IP. IP came in two ticks higher than expected at 0.6% m/m vs. a revised 1.0% (was 0.8%) in February, while the y/y rate came in at -1.0% vs. -1.3% expected and a revised -6.3% (was -6.4%) in February. The modest eurozone recovery continues.

Sweden reported soft April CPI. Headline came in at 3.9% y/y vs. 4.1% in March, CPIF came in at 2.3% y/y vs. 2.2% in March, and CPIF ex-energy came in steady at 2.9%. All three were a tick lower than expected. While CPIF still moved further above the 2% target, we believe the data support the Riksbank’s guidance that it is likely to cut the policy rate two more times during the second half of the year.

Riksbank also published its minutes to the May 7 meeting. At that meeting, the bank started the easing cycle by cutting rates 25 bp to 3.75%. The minutes showed that the bank was not concerned about a possible undershoot of the 2% target. Instead, policymakers saw the weak krona as an upside risk to inflation. The bank also saw upside risks from the Eurovision Song Contest and three Taylor Swift concerts in Sweden this month, which First Deputy Governor Breman noted could lead to temporarily higher prices for services. The market is pricing in nearly 30% odds of a cut June 27, rising to nearly 80% August 20. A total 75 bp of easing is seen over the next 12 months.


Australia reported softer Q1 wages. Nominal wage growth came in a tick lower than expected at both 0.8% q/q and 4.1% y/y. This was the first deceleration in the y/y rate since Q4 2020 and so wage growth appears to have peaked. However, looser fiscal policy complicates the RBA’s job of getting inflation down to target. The swaps market is pricing in steady rates over the next six months, followed by a possible start to the easing cycle over the subsequent six months.

China is reportedly considering a plan to have local governments buy millions of unsold homes. Reports suggest that local state-owned enterprises would purchase unsold homes from distressed developers at steep discounts using loans provided by state banks. Many of those homes would then be converted into affordable housing. Lastly, officials are reportedly still discussing details of the plan and whether it’s feasible. While this is encouraging news and could help ease China’s property slump, it does not deal with the root cause of China’s structural economic headwind: the country’s inability to rebalance the economy away from unproductive debt-fueled, investment-led growth towards sustainable consumption-led growth. Indeed, it appear that the plan would end up boosting debt even more.

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