• Fed officials remain cautious; PPI will be the data highlight; retail sales came in soft; estimated Q1 growth was revised lower; Michigan consumer sentiment will be key; December TIC data are worth discussing; Chile central bank minutes were very dovish
  
• U.K. January retail sales sizzled; Labour won two by-elections; Tories will be tempted to offer giveaways in Chancellor Hunt’s spring budget March 6; one ECB policymaker suggested the March meeting is live
  
• BOJ Governor Ueda broke no new ground; RBNZ Governor Orr spoke; PBOC sets its key MLF rate this weekend

The dollar is treading water ahead of PPI data. DXY is trading flat near 104.308 after trading lower for two straight days. The euro is trading higher near $1.0780, while sterling is trading flat near $1.26 despite firm retail sales data (see below). USD/JPY is trading higher near 150.15 as BOJ Governor Ueda sounded cautious (see below). When all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon. The data continue to come in firm while Fed officials remain cautious about easing. We still believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should see further gains after this current period of consolidation.

AMERICAS

Fed officials remain cautious. Bostic warned that “The evidence from data, our surveys, and our outreach says that victory is not clearly in hand and leaves me not yet comfortable that inflation is inexorably declining to our 2% objective.” He added “That may be true for some time, even if the January CPI report turns out to be an aberration. I require more confidence before declaring victory in this fight for price stability.” Elsewhere, Waller did not comment on policy but said “I do not expect to see the US dollar lose its status as the world’s reserve currency anytime soon. Recent developments that some have warned could threaten that status have, if anything, strengthened it, at least so far.” We agree with both of them. Barr and Daly speak today.

PPI will be the data highlight. Headline is expected at 0.6% y/y vs. 1.0% in December, while core is expected at 1.6% y/y vs. 1.8% in December. PPI inflation has been falling sharply since peaking in Q1 2022. However, some of the PPI data which feed into the calculation for the policy relevant PCE inflation remain too high. Specifically, PPI final demand services less trade, transportation, and warehousing rose 3.8% y/y in December 2023. If this measure continues to rise, it will undoubtedly keep the Fed in a cautious mode.

Retail sales came in soft. Headline sales fell -0.8% m/m vs. -0.2% expected and a revised 0.4% (was 0.6%) in December, while sales ex-autos fell -0.6% m/m vs. 0.2% expected and 0.4% in December. The so-called control group fell -0.4% m/m vs. 0.2% expected and 0.8% in December. We believe much of the weakness in January was due to unusually bad weather across much of the country last month. Of note, the y/y rates fell sharply but due in large part to high base effects. Headline slowed to 0.6% vs. 5.3% in December, ex-autos slowed to 1.2% vs. 4.4% in December, and control group slowed to 2.5% vs. 5.3% in December.

Estimated Q1 growth was revised lower. The Atlanta Fed’s GDPNow model is now tracking Q1 growth at 2.9% SAAR vs. 3.4% previously. That still doesn't take away from the narrative that the U.S. economy continues to outperform expectations. The early estimates are often volatile, and the next update comes today after the data. January building permits and housing starts are expected at 1.3% m/m and 0.0% m/m, respectively. New York Fed services index will also be reported and stood at -9.7 in January. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 3.3% SAAR and will also be updated today.

University of Michigan consumer sentiment will be key. Headline is expected to rise a full point to 80.0 and would be the highest since mid-2021. This would be consistent with an encouraging household spending outlook and why we are a bit skeptical of the weak January retail sales data. Current conditions are expected to rise to 82.5 while expectations are expected to fall to 77.1. 1-year inflation expectations are expected to remain steady at 2.9% while 5- to 10-year expectations are expected to fall a tick to 2.8%.

December TIC data are worth discussing. Overall global demand for USD-denominated assets remains robust, as total inflows were $139.8 bln vs. a revised $223.3 bln (was $260.2 bln) in November, while net long-term inflows were $160.2 bln vs. a revised $99.7 bln (was $126.1 bln) in November. Of note, the 12-month total net inflows totaled USD1.029 trln, which more than offsets the accumulated trade deficit of -USD773.4 bln over the same period. More importantly, China’s holdings of U.S. Treasuries rose for the second straight month to $816.3 bln, the highest since July, while Japan’s holdings rose for the third straight month to $1.138 trln, the highest since August 2022. All in all, the TIC data support exactly what Fed Governor Waller was saying.

Chile central bank minutes were very dovish. At the January 31 meeting, the bank cut rates 100 bp to 7.25%, as expected. However, the minutes showed that the bank discussed cuts of 100 or 125 bp, with one member in favor of a 150 bp move and was likely to favor that at the next meeting April 2. Aggressive easing already seen as led CLP to be the worst performer in EM by far at -9.2% YTD. After the first 100 bp cut in July led to excessive peso weakness, the bank dialed it back to 75 bp in September, 50 bp in October, and 75 bp in December. If peso weakness continues, the bank may have to dial it back again at the next meeting. The swaps market is pricing in 300 bp of easing over the next 12 months that would see the policy rate bottom at 4.25%.

EUROPE/MIDDLE EAST/AFRICA

U.K. January retail sales sizzled. Headline surged 3.4% m/m vs. 1.5% expected ana a revised -3.3% (was -3.2%) in December while ex-auto fuel jumped 3.2% m/m vs. 1.7% expected and a revised -3.5% (was -3.3%) in December. This was the largest monthly rise since April 2021 with sales volumes in all subsectors except clothing stores up over the month. The y/y rates for both improved to 0.7%, and for headline, this was the first positive reading since November and the strongest since March 2022. Bottom line: we doubt the BOE will be in a rush to move to less restrictive policy settings which remains GBP supportive, particularly versus EUR. The first cut is still priced in for August and only 75 bp of total easing is seen in 2024. Chief Economist Pill speaks today.

U.K. Labour Party won two by-elections. What’s particularly striking was the huge swing in votes as Labour flipped two seats previously held by the Tories. In Wellingborough, the swing towards Labour from the previous election was 28.5 points for a seat held by the Tories since 2005. In Kingswood, the swing was 16.4 points. Of note, Reform UK founded by Nigel Farage did well, winning 13% of the vote in Wellingborough and 10.4% in Kingswood. It is polling 12% nationally and suggests the party may siphon the most votes away from the Tories.

The Tories will be tempted to offer giveaways in Chancellor Hunt’s spring budget March 6. Reports emerged earlier this week that Hunt had dropped plans to cut the basic income tax or to reduce National Insurance employee contributions. Both were viewed as unaffordable, but the way things are going for the Tories, Hunt may have to roll the dice and deliver some tax relief after all. That said, we doubt Hunt will go through with rumored spending cuts to fund any tax giveaways due to the optics. Stay tuned.

One ECB policymaker suggested the March meeting is live. Governing Council member Scicluna said “March could be it for all I know. We’ll see how many think that there’s no need to wait for June.” He added that updated macro forecasts then could help underpin any shift in policy. Scicluna rarely comments on policy, but he is the first to suggest a March cut. That said, such an early move seems very unlikely. The market sees less than 10% odds of a cut then, rising to nearly 50% April 11 and fully priced in June 6. Schnabel speaks today and is likely to offer a hawkish counterpoint.

ASIA

BOJ Governor Ueda broke no new ground. Overnight, he said the BOJ will examine upcoming economic data “with great care”, including the outcomes of the upcoming spring wage negotiations. Ueda stressed that the BOJ aims to hit its sustainable 2% inflation target that will be accompanied by wage growth, as the bank wants to see the virtuous cycle of higher wages and stronger consumption gain momentum. It’s clear that the wage negotiations are key for the BOJ. The market still sees likely liftoff at the June 13-14 meeting, though the weak Q4 GDP data out earlier this week certainly complicates the situation.

RBNZ Governor Orr spoke. Orr did not offer any policy guidance ahead of the February 28 meeting. Instead, he talked about the drivers of inflation (core, tradable, and non-tradable inflation) and discussed why a 2% mid-point inflation target remains appropriate for New Zealand. He noted “We observe headline, but we are targeting in a large sense core inflation.” He then sounded cautious when he said “We’re moving in the right direction but it’s this tail end. We’ve got more work to do to have inflation expectations truly anchored at that 2% level. This is the part where capacity pressures and inflation expectations are the monetary committee’s real focus.” The market is pricing in only 20% odds of a hike February 28. Those odds rise to top out near 35% for both April 10 and May 22. However, the market is not pricing in any odds of a second hike.

The PBOC sets its key MLF rate this weekend. The rate is expected to be kept steady at 2.5% while the bank is expected to add CNY500 bln of liquidity through that mechanism vs. CNY995 bln last month. However, nearly a third of the analysts polled by Bloomberg see a 10 bp cut to 2.4%. Deflation deepened in January and weak aggregate demand suggests little relief in sight. While further monetary easing is likely in the coming months, it is unlikely to have much impact until the huge debt overhang is addressed.