Dollar Firm Ahead of US Retail Sales and IP Data

  • The dollar rally continues; the US data highlight today will be January retail sales and IP
  • The Fed announced that it will cut back on its repo operations again starting today
  • Senate confirmation for Fed nominee Judy Shelton will be a close call
  • Banco de Mexico cut rates by 25 bp to 7.0% yesterday; Brazil central bank intervened in the FX markets
  • Sterling is holding up after yesterday’s gains following the cabinet reshuffle; Eurozone Q4 GDP grew 0.9% y/y
  • Japan’s parliament confirmed Seiji Adachi to replace outgoing BOJ board member Yutaka Harada

The dollar is mostly firmer against the majors ahead of US retail sales and IP data.  The Loonie and euro are outperforming, while Stockie and Swissie are underperforming.  EM currencies are mixed.  ZAR and HUF are outperforming, while TRY and PHP are underperforming.  MSCI Asia Pacific was down 0.1% on the day, with the Nikkei falling 0.6%.  MSCI EM is up 0.1% so far today, with the Shanghai Composite rising 0.4%.  Euro Stoxx 600 is up 0.1% near midday, while US futures are pointing to a higher open.  10-year UST yields are down 2 bp at 1.60%, while the 3-month to 10-year spread is down 2 bp to stand at +3 bp.  Commodity prices are mixed, with Brent oil up 1.4%, copper down 0.4%, and gold flat.

The situation in Hubei province settled on Friday with just 4,823 new cases of the virus reported, now at nearly 65K globally.  The death toll rose to 1,383. There has been some confusion this week, as China changed its methodology for tracking the virus.  As such, we may need a few more days to get a cleaner read of the trends.  Meanwhile, the economic toll mounts as Fiat Chrysler announced its factory in Serbia will have to halt operations due to a shortage of parts from China.

The dollar rally continues.  DXY traded at a new cycle high today near 99.155 and remains on track to test the October 1 cycle high near 99.667.  After that is the May 2017 high near 99.888.  Elsewhere, the euro remains heavy and traded at a new low for this move near $1.0825.  There is a gap from April 2017 on the weekly charts between $1.0780-1.0820 that needs to be filled.  We remain bullish on the dollar.

 

AMERICAS

The US data highlight today will be January retail sales and IP.  Both headline and ex-auto sales are expected to rise 0.3% m/m.  The so-called control group used for GDP calculations is also expected to rise 0.3% m/m.  The strong jobs report last week supports our view that consumption will remain robust in 2020.  Elsewhere, IP is expected to fall -0.2% m/m.  Preliminary February University of Michigan will also be reported with a reading of 99.4 expected.  The Fed’s Mester speaks today.

The US economy remains strong.  Advance Q4 GDP came in at 2.1% SAAR and that strength appears to be carrying over into 2020.  The Atlanta Fed’s GDPNow model estimates Q1 GDP growth at 2.7% SAAR, while the NY Fed’s Nowcast model estimates Q1 GDP growth at 1.7% SAAR.  Both models will be updated today.  While these early reads are subject to significant revisions, we are clearly far from recession and the Fed is right to maintain steady rates in order to assess how the outlook unfolds in 2020.

The Fed announced that it will cut back on its repo operations again starting today.  It had already reduced its liquidity injections last month, and this continues the process as funding markets appear to have normalized as the result of the Fed’s recent actions to increase bank reserves through its bill purchases.  We wouldn’t make too much of this technical adjustment, as the Fed said it will continue its bill purchases into Q2.  Recall that under its model of maintaining amply excess reserves after the financial crisis, there was never a need to conduct repo operations until last fall, when balance sheet reduction apparently went too far.

Senate confirmation for Fed nominee Judy Shelton will be a close call.  Republican Senators Shelby, Toomey, and Kennedy said they have not decided whether to support her, with some expressing concern about her previous comments on Fed independence.  With a 13-12 split on the committee, it would only take one no vote from the Republicans to derail her nomination.  Given her past unorthodox statements on many topics, many (including us) felt that Shelton’s path to the Board would not be smooth.

Banco de Mexico cut rates by 25 bp to 7.0% yesterday, as expected.  However, the communique came in on the hawkish side. Officials sounded a bit more concerned about the inflation outlook, both on core and headline inflation expectations after the January print. The growth outlook remains negative, and we expect a few more cuts ahead, but this is a notable change in tone. USD/MXN dropped to the lowest level since mid-2018.

The Brazilian central bank intervened in the FX markets yesterday via swaps, surprising the markets. As we have been saying, USD/BRL trading above R$4.30 is well in the intervention zone, so we knew something could be in the pipeline. The problem was that (once again) the action came right after communication confirming they were comfortable with the FX moves. This is what happened in the last round of interventions (spot market) in November last year, much to the frustration of market participants. In any case, the impact on BRL was short-lived. The real is now almost back to yesterday’s weakest levels.

 

EUROPE/MIDDLE EAST/AFRICA

Sterling is holding up after yesterday’s gains following the cabinet reshuffle. The main headline was Chancellor Javid’s resignation and swift replacement with Rishi Sunak.  Javid was one of the big fiscal hawks in the cabinet and one of Prime Minister Johnson’s rivals in the race to succeed Theresa May, whilst Sunak is more closely aligned with Johnson.  The change, however clumsily done, supports our case for some upside growth risks from government spending and reduced odds of BOE cuts this year.  Aside from the impact on sterling, the move led to a small bear steeping of the curve.  Looking at the 2- to 10-year sector, the curve is still exceptionally flat, suggesting further room to steepen.

Eurozone Q4 GDP grew 0.9% y/y vs. 1.0% expected.  German Q4 GDP was flat q/q, slightly weaker than expected.  On the other hand, it grew 0.3% y/y (0.4% y/y WDA), which was slightly stronger than expected.  Even though some surveys have showed signs of optimism, it’s hard to argue with the very week industrial hard data seen towards the end of 2019.

Turkey’s current account balance showed a deficit of -$2.8 bln December, a narrower than expected. This figure is heavily impacted by seasonality factors, but the underlying trend is not favorable, with imports growing faster than imports. Lower oil and weaker lira will like kick in eventually as a positive factor, but on balance we think Turkey’s external accounts are another reason to be negative the lira.

Hungary’s Q4 GDP surprised to the upside at 1.0% q/q and a robust 4.5% y/y. This follows an upside surprise in January CPI yesterday, rising to 4.7% y/y from 4.0% in December.  However, the importance of Hungary’s exports to Europe means that the policy outlook will be a delicate balancing act, especially with the lackluster German industrial sector.  We think that the risk is very low that the MNB will follow the Czech central back with a surprise rate hike.

Elsewhere in the region, Polish GDP came in at 3.1% y/y (slightly above forecasts) while Czech growth was 1.7% y/y, below expectations for 2.0%. Also released today, January CPI surprised on the upside in both countries, rising a full percentage point to 4.4% y/y in Poland and by a few ticks to 3.6% y/y in Czech Republic.

 

ASIA

Japan’s parliament confirmed Seiji Adachi to replace outgoing BOJ board member Yutaka Harada.  Harada was known is one of the more dovish members, but many consider Adachi to be equally dovish.  His five-term begins March 26.  Adachi and Harada wrote a book together in 2013 that argued for spurring inflation, and so it’s pretty clear that the two share similar policy stances.  That said, it’s clear that policymakers are relying on fiscal stimulus to carry the load this year and that monetary policy is likely on hold for now.