Inflation Meets Retail Sales

March 11, 2024

Inflation Meets Retail Sales

  • USD and Treasury yields will take their cue from the US February CPI (Tuesday) and retail sales (Thursday) reports.
  • Norway’s February CPI print was weaker than expected.
  • Japan’s economy avoided a technical recession late last year.

USD is trading in a tight range after retracing more than 50% of its year-to-date uptrend last week. Narrowing near-term interest rate expectations between the US and other major economies is weighing on USD.

Indeed, recent US economic data releases have not been strong enough to justify a material upward adjustment to US interest rate futures. The mixed US non-farm payrolls report and ISM Services index along with dovish comments from Fed Chair Jay Powell support current money market pricing for a June rate cut. Furthermore, the market is now back to pricing in almost 100 bp of total easing this year after briefly matching the Fed’s 75 bp guidance in late February.

Meanwhile, other major central banks don’t appear in a rush to cut policy interest rates. Last week, ECB President Christine Lagarde pushed-back against a rate cut before June and the Bank of Canada warned “it’s too early to loosen the restrictive policy”.

Risks to USD and Treasury yields are asymmetric to the upside from this week’s US February CPI (Tuesday) and retail sales (Thursday) reports. Weaker than expected inflation and/or retail sale growth will reinforce the case for a Fed funds rate cut in June, which is virtually fully priced-in, so market reaction should be relatively contained. However, a bigger than expected rise in CPI and/or retail sales can trigger an upward adjustment to Fed funds futures in favour of a firmer USD and Treasury yields.

The New York Fed’s February survey of consumer inflation expectations is the highlight today (3:00pm London). In the UK, hawkish Bank of England policymaker Catherine Mann speaks (5:00pm London). There are no policy-relevant Eurozone economic data releases today. Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

NOK is range bound versus USD and EUR. Norway’s February CPI report supports money market pricing of a Norges Bank policy rate cut over Q3. Inflation slowed in February faster than consensus and the Norges Bank projected. Annual headline CPI inflation eased to 4.5% (consensus: 4.7%, Norges Bank: 5.3%) and CPI-ATE inflation (adjusted for tax changes and excluding energy products) slowed to 4.9%, the lowest since August 2022 (consensus: 5.3%, Norges Bank: 5.5%).

USD/JPY is heavy around 147.00 as odds of a Bank of Japan policy rate hike on 19 March remains high above 70%. Japan’s economy avoided a technical recession late last year. The final Q4 GDP print was revised up to 0.1% q/q from -0.1% q/q. Non-residential investment and net exports were the major growth driver over Q4. Private consumption continues to be a drag to growth. The Q1 BSI Business Outlook survey will offer timely insights on Japan’s growth outlook (11:50pm London).

AUD is underperforming most major currencies on slumping iron ore prices. Iron ore futures on the Dalian and SGX exchanges plunged by over 4% as inventories of the steelmaking ingredient at Chinese ports increased in March to near a one year high. We don’t expect new policy guidance from RBA Assistant Governor (Economics) Sarah Hunter’s panel discussion later this evening (10:30pm London).

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