Dollar Mixed Ahead of US Retail Sales Data

Dollar Mixed Ahead of US Retail Sales Data

  • August US retail sales data today is important ahead of the Thursday FOMC meeting
  • Germany ZEW was mixed in September
  • UK reported August CPI flat y/y, as expected and down from 0.1% in July
  • BOJ left policy unchanged, as expected
  • RBA minutes were released overnight
  • Poland reports August CPI; Chile central bank meets and is expected to keep rates steady\

Price action:  The dollar is mixed ahead of US retail sales data today.  The yen is outperforming after the BOJ left policy unchanged, while the Aussie is underperforming in the wake of RBA minutes.  The euro is trading flat near $1.13.  Sterling is also trading flat near $1.5425 after inflation data came in as expected, while dollar/yen is trading back below 120 again.  EM currencies are mixed.  RUB, SGD, and TRY are outperforming while IDR, KRW, and CZK are underperforming.  MSCI Asia Pacific was down 0.2%, with the Nikkei rising 0.3%.  Chinese markets were lower, with the Shanghai Composite down 3.5% and the Shenzen Composite down 5.0%.  Euro Stoxx 600 is down 0.4% near midday, while S&P futures are pointing to a higher open.  The US 10-year yield is down 1 bp to 2.17%, while European bond markets are mixed.  Commodity prices are mostly lower.

  • August US retail sales data today is important ahead of the Thursday FOMC meeting.  Consensus is for a headline gain of 0.3% m/m compared to a 0.6% gain in July.  Auto sales were strong last month, and so we see upside risks to the headline.  Sales ex-autos are expected to rise 0.2% m/m vs. 0.4% in July, while the so-called “control group” used for GDP calculations is expected to rise 0.3% m/m vs. 0.3% in July.
  • Yet the Fed does not rely on any single indicator in setting policy.  While the improving labor market argues for lift-off, most inflation readings do not.  August CPI will be reported tomorrow, with consensus at 0.2% y/y for headline and 1.9% y/y for core.  The Fed’s preferred measure of inflation (core PCE) was 1.3% y/y in Q2, and falling to 1.2% y/y in July.  US consumption has been soft in recent months, but we think the Fed puts more weight on the state of the labor market in terms of real sector data.  While strong retail sales would support the Fed’s case for lift-off, we do not think it is a make or break event.  During the North American session, the US will also report September Empire Manufacturing index, August IP and capacity utilization, and July business inventories.
  • Germany ZEW was mixed in September.  The current situation reading came in at 67.5 vs. 64.0 consensus, while the expectations component plunged to 12.1 vs. the 18.3 consensus.  We are surprised that the markets are not focusing more on the tragic refugee crisis that is opening up even more fissures in Europe.  Perhaps it is one reason for the sharply weaker expectations component, but we are surprised that the current situation in Germany is still seen as strong.
  • UK reported August CPI flat y/y, as expected and down from 0.1% in July.  Core rose 1.0% y/y, also as expected and down from 1.2% in July.  BOE’s Weale has flashed his hawkish credentials, warning of the importance of a rate hike “relatively soon.”  There are several more important UK data points that will be reported this week, including retail sales and employment.  The BOE hawks do not seem concerned that headline inflation has slipped back to zero, or that producer price deflation will deepen, or that retail sales are expected to be soft.  Next BOE meeting is October 8, and no change in policy is expected then.
  • BOJ left policy unchanged, as expected.  Governor Kuroda stuck to his upbeat outlook, saying the bank sees a gradual recovery in the economy but added that the BOJ would do more if needed.  The BOJ warned of risks to exports and production in Japan due to the slowdown in EM.  The next BOJ meeting is October 30, and a growing number of market participants (but still a minority) see additional easing measures then.  The yen has firmed today, with dollar/yen moving back below 120 to trade at its lowest level since September 8.
  • RBA minutes were released overnight. It was concerned about the impact of the China slowdown and heightened market volatility, saying they posed risks to the global growth outlook.  However, the RBA said it was too early to assess the actual impact on its growth forecasts for Australia.  It also noted that cost-cutting in the mining sector would eventually lead to weaker than expected investment.  All in all, there were no real surprises in the minutes.  AUD made a new high for this move near .7165 today before falling back a bit.  We think that with China numbers still softening, there is still an underlying dovish bias at the RBA.  Next RBA meeting is October 6, and no change is expected then.
  • Poland reports August CPI, and is expected to remain steady at -0.7% y/y.  August industrial output (6.4% y/y consensus), PPI (-2.4% y/y consensus), and retail sales (1.5% y/y consensus) will be reported Thursday, and the central bank will release minutes from its last meeting.  Despite the robust recovery, Poland still faces deflationary risks and so the central bank is likely to keep rates low until at least mid-2016.
  • Chile central bank meets and is expected to keep rates steady at 3.0%.  A small handful looks for a 25 bp hike to 3.25%.  Like neighboring Peru (who just hiked rates), Chile is facing inflation that’s above target and still rising.  It is also struggling with a sluggish economy, and so any tightening ahead is likely to be modest.