Dollar Broadly Firmer Ahead of US Retail Sales Data

  • The dollar has had a solid week, up against all the major currencies; US has a heavy slate of data today
  • China reported mixed May retail sales and IP data
  • White House advisor Larry Kudlow warned of consequences if Xi does not meet with Trump
  • New Zealand May manufacturing PMI sank to 50.2; Sweden May CPI unexpectedly accelerated
  • Russia central bank is expected to cut rates 25 bp to 7.5%; Colombia reports April retail sales and manufacturing production

The dollar is mostly firmer against the majors ahead of US retail sales data. Stockie and yen are outperforming, while the Antipodeans are underperforming. EM currencies are broadly weaker. ZAR and THB are outperforming, while TRY and INR are underperforming. MSCI Asia Pacific was down 0.1%, with the Nikkei rising 0.4%. MSCI EM is down 0.4% so far today, with the Shanghai Composite falling 1.0%. Euro Stoxx 600 is down 0.5% near midday, while US futures are pointing to a lower open. 10-year UST yields are down 3 bp at 2.06%, while the 3-month to 10-year spread has inverted 2 bp and stands at -10 bp. Commodity prices are mixed, with Brent oil down 0.2%, copper down 0.3%, and gold up 1.0%.

The dollar has had a solid week, up against all the major currencies. DXY has clawed back over a third of its losses seen after the May 30 peak. Lower US recession risk has been a big help, though WIRP shows a surprisingly high 30% chance of a rate cut next week. This likely overstates the case. We remain bullish on the dollar but acknowledge that today’s retail sales data is very important for the near-term direction of markets.

EM FX is mixed on the week. Though ARS and MXN are the big winners from positive political developments, TRY is being weighed down by political risk and CLP continues to feel the effects of last week’s surprise rate cut. We remain negative on EM given the current global backdrop.

US has a heavy slate of data today. The most important reading of the week is May retail sales. Consensus sees headline up 0.6% m/m and would be a good bounce from the -0.2% reported in April. Both sales ex-autos and the so-called control group are seen rising 0.4% m/m. May IP (0.2% m/m expected), April business inventories (0.5% m/m expected), and June Michigan sentiment (98.0 expected) will also be reported today.

China reported mixed May retail sales and IP data. They were expected to rise 8.1% y/y and 5.4% y/y, respectively. Instead, sales rose 8.6% y/y while IP rose 5.0% y/y.   This divergence probably won’t continue, as tariffs on US goods should eventually crimp consumption. Either way, policymakers are likely to add more stimulus as needed in the coming months.

White House advisor Larry Kudlow warned of consequences if Xi does not meet with Trump at G20 this month. He noted that Trump is still waiting for a response from Xi. Tellingly, Kudlow that China cannot get the balanced deal it is seeking because there is an “existing imbalance” that needs to be corrected.

New Zealand May manufacturing PMI sank to 50.2. This is the lowest reading since 2012 and points to continued softness in the economy. RBNZ just cut rates 25 bp in May and so another cut at the next meeting June 26 seems too soon. WIRP shows odds of a cut then at around 20%. We think a cut at the August 7 meeting is more likely. NZD is on track to test the recent cycle low from last month near .6480.

Sweden May CPI unexpectedly accelerated. Headline rose 2.2% y/y vs. 2.0% expected, while underlying CPIF rose 2.1% y/y vs. 1.9% expected. At its last meeting April 25, the Riksbank delivered a dovish hold by pushing the next hike out to end-2019 or early 2020 instead of sometime in H2 previously. The Riksbank added that “rate rises thereafter are expected to occur at a somewhat slower pace.”   Next policy meeting Is July 3 and no change is expected then.

Russia central bank is expected to cut rates 25 bp to 7.5%. Even though inflation of 5.1% y/y in May remains above the 4% target, it has been decelerating enough so that Governor Nabiullina said that a rate cut this week was possible. This would likely be the start of a slow but steady easing cycle that Bloomberg consensus sees taking the policy rate down to 7.0% by mid-2020.

Colombia reports April retail sales and manufacturing production. The former is expected to rise 4.5% y/y and the latter by 1.7% y/y, both slowing from March. Given the sluggish economy, we believe the central bank will keep rates steady this year. Next policy meeting is June 21, no change is expected then.