Dollar Steadies Ahead of Retail Sales Data

January 16, 2025
  • December retail sales data will be the highlight; December CPI data had a little something for everyone; Fed Beige Book report for the January meeting was fairly upbeat; regional Fed surveys for January will continue rolling out; Scott Bessent’s confirmation hearing will be held today
  • ECB releases its account of the December 11-12 meeting shortly; U.K. reported soft November real sector data; BOE has room to ease further and support economic activity as inflation is cooling; Poland is expected to keep rates steady at 5.75%
  • Reports suggest the BOJ is likely to hike rates next week; Australia reported solid December jobs data; Korea left rates steady at 3.0% vs. an expected 25 bp cut

The dollar Is steadying ahead of retail sales data. DXY is trading flat near 109.116 after two straight down days. The yen is outperforming after reports that the BOJ is likely to hike rates next week (see below), with USD/JPY trading at the lowest since December 19 near 155.20 before recovering to 155.75 currently. Sterling is underperforming after weak real sector data (see below) and is trading lower near $1.2205, while the euro is trading flat near $1.0290 ahead of the ECB account of its December meeting (see below). Scott Bessent will have his confirmation hearing today (see below). More tariff noise is likely in the coming days and weeks but we continue to look through that and focus on the underlying fundamental backdrop, which remains unchanged. Simply put, the strong U.S. fundamental story of strong growth, elevated inflation, and a more hawkish Fed continues to favor higher U.S. yields and a stronger dollar.

AMERICAS

December retail sales data will be the highlight. Consensus sees headline at 0.6% m/m vs. 0.7% in November and ex-autos at 0.5% m/m vs. 0.2% in November. More importantly, the so-called control group used for GDP calculations is expected at 0.4% m/m vs. 0.4% in November. Overall, consumer spending is supported by positive real wage growth, a healthy labor market, and strong household balance sheets.

Growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q4 growth at 2.7% SAAR and will be updated today after the data. Elsewhere, the New York Fed's Nowcast model is tracking Q4 growth at 2.4% SAAR vs. 1.9% last week and Q1 growth at 2.7% SAAR vs. 2.2% last week and will be updated tomorrow.

December CPI data had a little something for everyone. Headline CPI came in as expected at 2.9% y/y vs. 2.7% in November, while core CPI came in a tick lower than expected at 3.2% y/y vs. 3.3% in November. Pessimists will focus on the continued acceleration in headline, while optimists will focus on the downside miss in core as well as super core falling a tick to 4.1% y/y. Overall, we believe the data show that price pressures remain alive and well. The Cleveland Fed’s Nowcast model forecasts January headline and core at 2.8% y/y and 3.1% y/y, respectively, which means another month of inflation close to 3% as progress on inflation continues to stall well above the 2% target.

The Fed Beige Book report for the January meeting was fairly upbeat. On overall economic activity: Economic activity increased slightly to moderately across the twelve Federal Reserve Districts in late November and December. Consumer spending moved up moderately, with most Districts reporting strong holiday sales that exceeded expectations. More contacts were optimistic about the outlook for 2025 than were pessimistic about it, though contacts in several Districts expressed concerns that changes in immigration and tariff policy could negatively affect the economy. On labor markets: Employment ticked up on balance, with six Districts reporting a slight increase and six reporting no change. Wage growth picked up to a moderate pace in most Districts, though there were some reports that wage pressures had eased. On prices: Prices increased modestly overall, with growth rates ranging from flat to moderate. Contacts expected prices to continue to rise in 2025, with some noting the potential for higher tariffs to contribute to price increases.

Regional Fed surveys for January will continue rolling out. Philly Fed manufacturing (-5.0 expected) and New York Fed services surveys will be reported today. Yesterday, the Empire manufacturing survey kicked things off and came in at -12.6 vs. 3.0 expected and a revised 2.1 (was 0.2) in December.

Scott Bessent’s confirmation hearing will be held today. President-elect Donald Trump's pick for Treasury secretary, will face a Senate Finance Committee hearing. Bessent is expected to be questioned on currency policy and the fiscal outlook. In his prepared remarks, Bessent wrote “we must ensure that the U.S. dollar remains the world’s reserve currency.” We concur. Elsewhere, Stephen Miran’s 41-page essay “A User’s Guide to Restructuring the Global Trading System” offers a good framework to understand the range of possible tariff and currency policies that might be implemented by the incoming Trump administration. Miran was nominated in late December to chair Trump’s Council of Economic Advisers.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank releases its account of the December 11-12 meeting shortly. At that meeting, the ECB reduced the policy rate 25 bp to 3.0%, as expected. However, the ECB signaled more easing was in the pipeline. The ECB tweaked its macro projections lower and scrapped reference that it “will keep policy rates sufficiently restrictive for as long as necessary.” President Lagarde acknowledged there were some discussions around the proposal for a 50 bp cut. However, she also emphasized the need to be “very cautious” when domestic inflation is still around 4% y/y. The market is pricing in 100 bp of easing over the next 12 months that would take the policy rate down to 2.0%.

U.K. reported soft November real sector data. GDP came in a tick lower than expected at 0.1% m/m vs. -0.1% in October, IP came in half a percentage point lower than expected at -0.4% m/m vs. -0.6% in October, services index came in as expected at 0.1% m/m vs. a revised -0.1% (was 0.0%) in October, and construction came in as expected at 0.4% m/m vs. a revised -0.3% (was -0.4%) in October. With the exception of construction, all the y/y rates worsened, and it’s quite possible that GDP stagnated q/q in Q4.

The BOE has room to ease further and support economic activity as inflation is cooling. MPC member Taylor noted yesterday that “We are in the last half mile on inflation, but with the economy weakening, it’s time to get interest rates back toward normal to sustain a soft landing.” The market is pricing almost 90% odds of a 25 bp cut in February and a total of 50 bp of cuts over the next 12 months (but now edging towards 75 bp). Of note, Taylor was one of three dissents in favor of cutting rates back in December.

National Bank of Poland is expected to keep rates steady at 5.75%. At the last meeting December 4, the bank kept rates steady at 5.75%. However, Governor Glapinski unexpectedly pushed his outlook for rate cuts out to 2026 from mid-2025 because the inflation outlook has become more “complicated.” His updated view exposed a rift on the MPC, as several members said they still expect to start discussing easing in March. According to MPC member Kotecki “the position of the central bank’s governor is not the position of the Monetary Policy Council…Unfortunately, these comments are probably dictated by some political considerations.” The swaps market is pricing in 25 bp of easing over the next three months followed by 25 bp of easing over the subsequent three months. December core CPI will be reported shortly and is expected to fall a tick to 4.2% y/y.

ASIA

Reports suggest the Bank of Japan is likely to hike rates next week. The unnamed officials said the only caveat was a potential policy surprise from Trump ahead of the decision, as inflation and wages were in line with the bank’s efforts to meet the 2% target. Following this report, the odds of a rate hike at the January 24 meeting increased to over 85% vs. 70% yesterday and 50% last week. We are sticking to our view that the BOJ will wait until March to resume normalizing rates as wage trend will be clearer by then. However, we acknowledge that risks of a hike next week are high given all the trial balloons and leaks. Japan’s December CPI print, due a few hours before the BOJ policy rate announcement, will serve as a key factor influencing policymakers’ decision.

Australia reported solid December jobs data. 56.3k jobs were added vs. 15.0k expected and a revised 28.2k (was 35.6k) in November. However, the mix was not so favorable as 80.0k part-time jobs added were offset by -23.7k full-time jobs lost, the first decline since August 2024. The unemployment rate rose a tick as expected to 4.0% despite a one tick rise in the participation rate to 67.1%. We believe Australia’s Q4 CPI due January 29 will either lock in a February RBA rate cut or give the RBA space to delay the start of easing a bit longer. Markets continue to price in roughly 70% odds of a 25 bp rate cut in February. We agree.

Bank of Korea left rates steady at 3.0% vs. an expected 25 bp cut. The bank had cut rates 25 bp two straight meetings but said that FX uncertainty was one of the reasons for this current hold. Governor Rhee said there was one dissent in favor of a cut but added that all six members of the board saw a “great chance” of a cut over the next three months. Rhee added that political stability was most important for the economy now and estimated that the exchange rate was about 30 won weaker due to political turmoil. The swaps market is pricing steady rates over the next three months but still sees the policy rate bottoming near 2.50% over the next 12 months.

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