Dollar Narrowly Mixed Ahead of US Retail Sales and PPI

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  • President Trump ousted Secretary of State Rex Tillerson
  • US retail sales for February will be reported
  • ECB chief Draghi sounded some words of warning
  • Press reports suggest the US will soon announce trade sanctions on China
  • China reported January-February IP and retail sales; Colombia reports January IP and retail sales

The dollar is narrowly mixed against the majors ahead of US retail sales and PPI data. Aussie and Loonie are outperforming, while the euro and Swissie are underperforming. EM currencies are mixed too. THB and ZAR are outperforming, while MYR and PHP are underperforming. MSCI Asia Pacific was down 0.4%, with the Nikkei falling 0.9%. MSCI EM is down 0.3% on the day, with the Shanghai Composite falling 0.6%. Euro Stoxx 600 is up 0.3% near midday, while S&P futures are pointing to a higher open. The 10-year US yield is flat at 2.84%. Commodity prices are mixed, with oil up 0.5%, copper up 0.4%, and gold down 0.1%.

President Trump ousted Secretary of State Rex Tillerson. He will be replaced by CIA Director Mike Pompeo. Pompeo in turn will be replaced by Deputy Director Gina Haspel, who has been at the CIA since 1985. The moves have been long-rumored but come at a delicate time given planned talks with North Korea.

The dollar sold off on this news, which fits into the narrative of chaos at the White House. Tillerson was considered one of the stabilizing forces in the administration so his exit on top of Cohn’s is concerning. Bottom line is that the stabilizing forces (Cohn, Tillerson, maybe even Kelly?) have lost influence in the administration and given way to Navarro, Ross, Lighthizer, and Pompeo. This group tends to be much more confrontational and so the US will continue to push its America First trade agenda. Diplomatic relations with North Korea and Iran are likely to come under greater pressure.

No one likes the dollar right now, so buying EUR, GBP, and JPY seems to be the safe trade. Yet these three all come with their own set of baggage (ECB pushback, Brexit, Japan land scandal, etc.). Elsewhere, we think America First is not good for small open economies and so we can’t get too EM-bullish in this environment. More specifically, we think America First means that risks of NAFTA breaking down are rising and so we’d be underweight MXN in this environment.

ECB chief Draghi sounded some words of warning. While promising predictable policy, he stressed that the bank still needs to see evidence that inflation dynamics are moving in the right direction. He added that the ECB will remain “patient, persistent, and prudent.” Draghi also said recent euro gains can’t be explained just by the stronger economy. Yesterday, ECB’s Lane said that the pace of the euro’s move is more important than the level.

US retail sales for February will be reported. The consumer appears to be a little less buoyant. A 0.3% mm rise in February retail sales would simply offset the 0.3% decline in January, leaving a flat performance. The components that feed into GDP may hold in a bit better, but together January-February may average near trend of 0.2%. PPI will also be reported, with headline expected at 2.8% y/y and core at 2.6% y/y. Yesterday’s CPI data was spot on consensus.

Press reports suggest the US will soon announce trade sanctions on China targeting as much as $60 bln per annum in imports. USTR Lighthizer reportedly presented Trump with a package totaling $30 bln but was urged by Trump to boost that number. Tariffs would be a response to China’s alleged theft of intellectual property.

China reported January-February IP and retail sales. The two months are combined to limit Lunar New Year distortions. IP rose 7.2% y/y vs. 6.2% expected, while sales rose 9.7% y/y vs. 9.8% expected. For now, markets appear comfortable with the mainland macro backdrop. Policymakers kept the growth target for this year steady at 6.5%, which signals “steady as she goes.”

Colombia reports January IP and retail sales. The former is expected to rise 2.7% y/y and the latter by 1.1% y/y. The economy remains sluggish and so the easing cycle should continue. In recent months, the bank has cut rates every other meeting. Since it just cut 25 bp to 4.5% at its last meeting in January, it will likely stand pat at the next meeting March 20 in favor of a move at the April 27 meeting.