19 February, 2016
FX News Today
The yen has held firm amid a moderate risk-off theme in Asia, where stock markets traded mostly lower after Wall Street’s best-in-eight-weeks three-day rally came to an end. USDJPY dipped to a four-day low at 112.71, while the equity market correlative AUDJPY cross fell 1.9%. Both USDJPY and AUDJPY still remain comfortably above trend lows, while most of the main Asian equity indexes are still about 3% higher on the week despite today’s declines. Oil prices are down about 1% but remain a good 20% or so above trend lows. Japanese data today were discouraging, with the all Industry activity index falling 0.9% m/m in December, below the -0.3% median forecast, while department store sales tumbled 1.9% y/y in January.
BoE MPC’s Weale is concerned about market expectations regarding when the central bank will hike interest rates. He remarked in an interview with the Irish Times that “I would be surprised if people had to wait as long as markets are currently implying,” although he added that “markets may well turn out to be right.” BoE deputy governor Cunliffe also described yesterday this as unwarranted, which caused sterling to rally, although the latest survey from Reuters found a consensus among market economists expecting the a tightening by around the end of this year. Weale argued that the disinflationary effects of last sterling strength “is not an effect that is going to last forever,” and that “if we look at core measures of inflation, those are closer to the target but still below the target.” He said that wage pressure as a key issue. While prospects of BoE tightening remain in the distance, Cunliffe and Weale’s interjections are clearly aimed at balancing the market narrative.
SF Fed’s Williams has not really changed his outlook on the US or the global economy, despite the recent fluctuations, he said, adding that he will adjust his views on conditions and the policy path with more data. The “daily dives” in equity markets are not accurate reflections of the economy and shouldn’t be viewed as “the four horsemen of the apocalypse.” Growth is still estimated in the 2.25% area for the year and the unemployment rate should dip further and hit 4.5% by later in the year. He is not happy about the inflation rate but expects it to return to 2% over the next 2 years. He is monitoring potential risks and “closely watching” developments abroad. This isn’t anything new from Williams, and he is not a voter this year.
Yesterday’s US reports were encouraging on net, though with diverging signals from a tightening in initial claims but with big February Philly Fed component declines and a 0.2% January leading indicators drop. For claims, we saw a 7k decline to just 262k in the BLS survey week to leave a 23k two-week drop that reversed elevated holiday levels and left upside risk for our 190k February payroll estimate. For Philly Fed, the slight headline rise to -3.5 accompanied a sharp ISM-adjusted drop to a 45.5 three-year low thanks to declines in every component.
Main Macro Events Today
US Consumer Price Index: the January headline CPI is expected to decline 0.1%, while the core index rises 0.1%. Forecast risk: downward, as further weakness in gasoline prices could weigh. Market risk: downward, as inflation undershoots may affect the timing of additional rate hikes.
Canada Retail Sales: are expected to fall 1.0% in December after the 1.7% surge in November. The ex-autos sales aggregate is seen declining 0.7% m/m in December after the 1.1% bounce higher in November. An as expected drop in total retail sales that is accompanied by a similar sized pull-back in the “real” (price adjusted) sales basis would partly counter the firm manufacturing and wholesale shipment gains seen in December. We expect an 0.2% gain in December GPD.
Canada CPI: We expect the CPI, due today, to expand at a 1.7% y/y pace in January, accelerating slightly from the 1.6% growth rate in December. CPI is seen falling 0.1% month comparable basis in January after the 0.5% plunge in December. Gas prices fell 7.0% in January compared to December, which is expected to weigh on month comparable CPI.
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