February 16, 2024

“A weak US retail sales spurred on the latest swing in the FX markets yesterday, denting the dollar’s strength significantly as spending growth slowed. The British equivalent meanwhile vastly overperformed but is ultimately overshadowed by other economic measures.”

Tim Hallinan – Trading Director

Main Headlines

Japan’s Nikkei index is nearing its all-time high of 38,957 points set in 1989, following another closure at a 34-year peak on Thursday, supported by a strong performance on Wall Street. With a 4.3% increase for the week, marking the third consecutive week of gains, the index has seen year-to-date gains of 15%. Despite Japan’s confirmation of a technical recession last year, the weakening yen has spurred foreign investors to engage in some of the most significant purchases of cheap Japanese assets in years.

A new report has suggested establishing a technical group this year to establish common standards and processes across the London Stock Exchange and other market entities, ahead of Britain moving forward with expediting share transactions to align with Wall Street, aiming for faster settlement times. Starting from the end of May, shares traded in the US, Canada, and Mexico will settle in just one business day (T+1), compared to the current two-day period. This shift aims to streamline transactions while providing adequate time for market participants to adjust their systems accordingly.

GBP

Sterling’s bumpy week continues, stirred this morning by a strong retail sales surge in January. Retail spending recovered from a -3.3% contraction in December to print at 3.4% growth, more than double the consensus estimate of 1.5%. While the implications for the growth outlook are positive, with many expecting an uptick early this year, the Bank of England’s rhetoric has largely quashed the potential for smaller scale changes to generate price action in the pound. Measures of wage growth and the labour market have stolen the limelight amid a firm focus on these dynamics for determining the sterling rate path, hence the pound’s marginally weaker position this morning. Further moves today will depend on the US data, although BoE Chief Economist Huw Pill will give his view this evening.

EUR

The euro recovered fiercely against the dollar yesterday, surging 0.4% as US retail sales data disappointed. Comments from ECB President Lagarde emphasised her desire to avoid a reversal in policy easing in the situation that rates are cut too early, highlighting again the April wage data that is taking on increasing importance for the euro’s direction this year. The European Commission, meanwhile, sharply revised down its projections for euro area growth this year to 0.8% from 1.2%. The data calendar is empty for the euro today, so expect it to continue to track developments in the US as investors gear up for some critical PMI data next week.

USD

Weaker-than-expected retail sales data for January all but nullified the dollar’s CPI-induced rally from earlier in the week. The -0.8% figure vastly underperformed the consensus for -0.2%, but the extent of the move was puzzling. A single data point will not upend the narrative that US economic exceptionalism will allow the Fed space to be patient and methodical in policy normalisation, and that is before considering the temporary impact of some extreme weather on what is typically a volatile measure. Accordingly, US yields barely budged, suggesting that the dollar weakness reflected some sort of corrective move. PPI inflation is today’s big event which, alongside Tuesday’s CPI print, should provide markets with a solid cross-read for the Fed-favoured core PCE price index due later in the month. Producer price inflation has printed particularly low as of late, and is expected to have increased 0.1% month-on-month in January.

Markets

A strong rally in Asian stocks this morning is likely to carry over to the European session today, after soft US spending data propelled Wall Street as traders increased their expectations for rate cuts this year. This optimism drove the S&P 500 up 0.6% yesterday while the Dow Jones surged 0.9%.

Main Economic Events (All Times CET)

8:00am: UK Retail Sales
2:30pm: US PPI and Building Permits
3:10pm: Fed’s Barr speaks
4:00pm: US UoM Consumer Sentiment

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