Dollar Soft Ahead of Retail Sales Data

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Win Thin
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• There were no surprises in the US-China Phase One trade deal
• The dollar is drifting lower ahead of the key retail sales data; there are other minor US data out today
• Bank of England credit survey showed demand for loans fell in Q4
• Turkey cut its one-week repo rate by 75 bps to 11.25%; South Africa is expected to keep rates steady at 6.5%
• Japan reported November core machine orders and December PPI; China’s credit numbers for December showed no big change in lending

The dollar is mostly softer against the majors ahead of key US retail sales data. The Antipodeans are outperforming, while yen and Stockie are underperforming. EM currencies are mixed. IDR and MYR are outperforming, while THB and KRW are underperforming. MSCI Asia Pacific was up 0.2% on the day, with the Nikkei rising 0.1%. MSCI EM is up 0.1% so far today, with the Shanghai Composite falling 0.5%. Euro Stoxx 600 is flat near midday, while US futures are pointing to a higher open. 10-year UST yields are flat at 1.79%, while the 3-month to 10-year spread is up 1 bp at +24 bp. Commodity prices are mostly higher, with Brent oil up 0.5%, copper up 0.4%, and gold flat.

There were no surprises in the 86-page document outlining the US-China Phase One trade deal. This leaves a long and arduous road ahead to reach a Phase Two deal that would further reduce the tariffs still in place, but there seems to be no hurry. The deal at hand also leaves some big contentious issues untouched, such as the US’ concern about China’s state subsidy practices. Here are some of the highlights of the deal signed yesterday, as China agreed to 1) increase agricultural purchases by $200 bln (based on 2017 levels) over the next two years and to relax non-tariff trade barriers such as health standards and GMOs, 2) refrain from competitive currency devaluation and maintain a market-based exchange rate, 3) allow for more competition in the financial sector in areas ranging from asset management to banking services, 4) improve intellectual property protections in China with stricter guidelines on patents, trademarks, 5) end of forced technology transfer in exchange for market access.

The dollar is drifting lower ahead of the key retail sales data. While we remain bullish on the dollar, DXY has been giving up some of its recent gains after it was unable to cleanly breach the 97.50 area. Near-term direction will be driven by today’s data. The euro is trying to build on its break above the $1.1150 area, while sterling continues to creep higher after its break above the $1.30 area. Meanwhile, USD/JPY has seen no follow-through of its break above 110 and remains stuck near that level.

AMERICAS

The most important reading for the US this week is retail sales today. Headline retail sales are expected to rise 0.3% m/m, ex-autos by 0.5%, and the so-called control group by 0.4%. All would represent acceleration from November and would support the notion that the US consumer remains alive and well. The labor market remains solid and supportive for consumption in 2020.

Fed officials are mostly singing from the same songbook. They appear united in their belief that the US outlook remains solid and that no policy changes are needed unless there is a “material change.” There are no Fed speakers today and after tomorrow’s speech by Harker, the media embargo kicks in and there will be no communication until Powell’s post-decision press conference January 29.

There are other minor US data out today. December export/import prices will be reported along with weekly jobless claims, November business inventories, and November TIC data. Philly Fed will also be reported and is expected to improve to 3.7 from a revised 2.4 (was 0.3) in December. Yesterday, the Fed manufacturing surveys for January kicked off with a firm Empire manufacturing reading of 4.8 vs. 3.6 expected and a revised 3.3 (was 3.5) in December.

EUROPE/MIDDLE EAST/AFRICA

Bank of England credit survey showed demand for loans fell in Q4. Furthermore, demand is expected to fall again in Q1 and so headwinds on the economy are likely to remain in place this year. Clearly, the uncertainty surrounding Brexit continues to take a toll on the economy and BOE easing expectations are rising as a result of weak data. Please see our recent piece “UK Economy Continues to Suffer” for an in-depth look at the UK outlook.   

The Turkish central bank cut its one-week repo rate by 75 bp to 11.25%, largely as expected. This is the first time since the latest easing cycle began that the institution did not overdeliver. We are confident that—barring a revival in downward pressure on the lira—more cuts are coming this year. However, today’s relatively conservative move may be an indication that easing won’t be as aggressive now and will be delivered more gradually. This could be a consequence of the recent year-end pickup in CPI to 11.46% y/y in December. The lira is little changed in the aftermath of the decision. 

South Africa Reserve Bank is expected to keep rates steady at 6.5%. However, a small handful of analysts look for a 25 bp cut to 6.25%.  CPI rose 3.6% y/y in November, the lowest since February 2011 and near the bottom of the 3-6% target range. We see slight risks of a dovish surprise, though perhaps less so since the rand remains under some modest pressure ahead of the meeting. Uncertainty over a potential Moody’s downgrade after the February budget is another factor for SARB to be cautious.

ASIA

Japan reported November core machine orders and December PPI. Orders rose 5.3% y/y vs. -5.3% expected, while PPI rose 0.9% y/y, as expected. Orders are a very volatile series and so we can’t get too excited over one month, especially as most Q4 data have been very weak. While government officials are putting more blame on the typhoon, we do think that the consumption tax hike is also playing a large role. Next BOJ meeting is January 21 and no change is expected.  With fiscal stimulus in the pipeline, we suspect monetary policy will be sidelined for now.

China’s credit numbers for December showed no big change in lending. Aggregate financing was slightly higher on the month at CNY2.1 trln and came in at RMB25.6 trln ($3.7 trln) for the year, up 14% from 2018. While the numbers are not necessarily a negative development, they do raise some questions about the impact of the recent monetary easing measures, and why lending hasn’t accelerated more. This suggest that the easing bias will remain in place following the recent cut in required reserve ratio, with further cuts to the Loan Prime Rate (LPR) likely in the coming months. The yuan continues to appreciate, gaining in five of the last six sessions to an accumulated +1.3% so far this year.