Shop Till You Drop?

March 14, 2024

Shop Till You Drop?

  • USD is staging a modest recovery ahead of today’s key US February retail sales print.
  • ECB Governing Council member Yannis Stournaras cranks-up the dovish rhetoric.
  • Disinflationary pressure in Sweden is gaining traction.

USD retraced some of yesterday’s losses in line with the pick-up in 10-year Treasury yields and US interest rate expectations. Feds funds futures are now back at matching the Fed’s 75 bp rate cut guidance for 2024 versus 95 bp on Monday.

Sticky US core price inflation and the encouraging economic growth outlook suggest the risk is the Fed’s new projections (released next Wednesday) imply less easing for 2024 (50 bp of rate cuts versus 75 bp now). This can drag Fed expectations higher in favour of a firmer USD and Treasury yields.

The US February retail sales report is today’s main highlight (12:30pm London). Market participants expect retail sales to rebound by 0.8% m/m in February after unexpectedly falling 0.8% m/m in January. Importantly, the control group retail sales (which exclude cars, gas, food services, and building materials and feeds into the GDP calculation) is forecast to rise by 0.4% in February following a 0.4% decline the previous month.

Robust US consumer spending activity will further curtail money market expectations of Fed funds rate cuts and add upside momentum to USD. In contrast, any evidence that spending is buckling under the weight of higher interest rates and depleting excess savings can trigger another downside correction in USD.

The US February PPI report (12:30pm London) will likely generate less financial market volatility. PPI final demand is anticipated to rise by 0.3% m/m in February to be up 1.2% y/y from 0.9% y/y in January. The prices paid sub-components of the ISM indexes point to downside risk to PPI inflation.

EUR/USD briefly dipped this morning by over 10pips to near 1.0932 following dovish comments by ECB Governing Council member Yannis Stournaras. Stournaras supports money market pricing of 100 bps of total ECB policy rate cuts in 2024 noting “it is appropriate to do two rate cuts before the summer break, and four moves throughout the year seem reasonable”.

GBP/USD and EUR/USD will be guided today by the US retail sales report. There are no policy-relevant UK or Eurozone economic data releases today. Overnight, the UK February RICS residential market survey remains consistent with a recovery in housing market activity. The house price balance improved to -10 in February (the lowest level since October 2022) from -19 in January.

Yesterday, the ECB concluded the review of its operational framework for implementing monetary policy that started in December 2022. The changes will affect how ECB liquidity will be provided and has no monetary policy implications. The purpose of the operational framework is to steer short-term money market rates closely in line with the ECB’s monetary policy decisions.

SEK is underperforming most major currencies. Slower than expected inflation in Sweden reinforces the case for a Riskbank policy rate cut in May or June. The policy relevant CPIF inflation slowed to 2.5% y/y in February (consensus: 2.8%) from 3.3% the previous month. CPIF excluding energy eased to a two-year low of 3.5% y/y (consensus: 3.6%) from 4.4% in January. Sweden’s OIS curve implies an 80% probability of a 25 bp Riksbank policy rate cut over the next three months.

NZD/USD is holding above 0.6150. The recovery in New Zealand house prices continues as REINZ house prices rose 3.2% y/y in February, the most since May 2022. New Zealand’s OIS curve has more than fully priced-in 50 bp of OCR cuts this year which remains a headwind for NZD.

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