Retail Therapy

April 15, 2024

Retail Therapy

  • Financial markets unrattled by Iran’s strike against Israel.
  • The US March retail sales report is today’s highlight.
  • USD/JPY breaking higher.

Equity and bond markets were a little shaken Friday on Iran-Israel tensions. The S&P500 plunged 1.5% and the sell-off in Treasuries eased slightly. USD was broadly firm near multi-month highs, crude oil prices had a modest kneejerk upside move and gold prices surged to a new high.

Financial market reaction following Iran’s strike over the weekend against Israel is so far contained. Brent crude oil prices are range bound around US$90 a barrel, gold is trading in a tight range 3% below Friday’s high, S&P500 futures point to a positive open and yields on Treasury futures are up.

USD is modestly lower largely against commodity-sensitive currencies (MXN, AUD, NOK, CAD). Safe haven currencies (CHF and JPY) are underperforming. In our view, higher US yields and US economic outperformance will continue to underpin the dollar’s uptrend. US data this week should show that the labour market remains in good shape and that consumption is robust. As such, there is also plenty of room for a further reassessment in Fed funds rate expectations in favour of a firmer USD and Treasury yields.

The US March retail sales report is today’s highlight (1:30pm London). Headline is expected at 0.4% m/m vs. 0.6% in February, while ex-autos is expected at 0.5% m/m vs. 0.3% in February. The so-called control group used for GDP calculations is expected at 0.4% m/m vs. 0.0% in February. Overall, consumer spending remains resilient, supported by robust demand for labor and positive real wage growth. New York Fed President John Williams speaks today and will likely stick to his message that there is no need to adjust policy in the very near term (1:30pm London).

EUR/USD is consolidating near recent lows around 1.0650. The Eurozone February industrial production data is unlikely to be big market mover (10:00am London). Market participants have pencilled-in a 0.8% rise vs. -3.2% in January. The manufacturing PMI points to downside risk. ECB speakers today include: Governing Council member Gediminas Simkus (8:30 London), Chief Economist Philip Lane (1:00pm London), Pablo Hernández de Cos (6:40pm London).

USD/JPY is breaking higher, trading just under 154.00. USD/JPY uptrend is intact because we anticipate a gradual BOJ tightening process and a more muted than currently priced-in Fed easing cycle. However, ongoing threat of intervention will cushion the yen’s slide. Japan’s Finance Minister Shunichi Suzuki warned again this morning he’s watching FX moves closely.

NZD/USD is directionless near recent lows around 0.5950. The RBNZ released an updated research report on its estimates of New Zealand’s nominal neutral interest rate (rate at which the monetary policy stance is neutral). According to the RBNZ, the long-term (10 years or more) nominal neutral rate is around 2.5% (unchanged from past estimates). The short-term (1-2 years) nominal neutral rate is higher at around 3.9%.

With the RBNZ Official Cash Rate at 5.5%, monetary policy is tight and weighing on economic activity. Indeed, New Zealand’s performing services index fell to a 47.5 in March (lowest since January 2002) indicative of a contraction in the service sector. The swaps market is pricing a first cut in October and 44bps of total easing this year.

AUD/USD is firmer supported by rising iron ore prices. Iron ore future prices on the Singapore and Dalian exchanges are at more than a one month high on speculation demand in China picks-up. China’s March economic activity data release tomorrow morning is expected to show that a modest cyclical recovery is underway.

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