Fundamental Analysis 12.01.2018 - Market Outlook

12 / 01 / 2018 | Market News

Market Recap

EUR rose and USD fell on a combination of a hawkish reading of the European Central Bank (ECB) minutes plus an unexpected decline in US producer prices and rise in jobless claims.

The minutes of the December 2017 ECB meeting hinted that the Bank could adjust its forward guidance language early this year if the economic and inflation picture improves. They also noted that the recent higher oil prices are likely to push inflation higher. Brent yesterday briefly went above $70/bbl, the highest it’s been since July 2015.

As for the US, the Producer Price Index (PPI) for final demand fell 0.1% on the month vs an expected rise of +0.2%. This was the first decline in around 1 ½ years. This unexpected decline may explain why the market largely ignored some hawkish comments by New York Federal Reserve President William Dudley, who said the Federal Reserver may have to “press harder on the brakes at some point over the next few years.”

The fall in PPI only increases the importance of today’s US CPI. That’s expected to show no acceleration in inflation, which could further weaken USD (see below).

AUD weakened after China’s trade data for December 2017 showed a sharp slowdown in imports, which rose only 4.5% yoy, as compared to 17.6% yoy in the previous month. China takes 35% of Australia’s exports. Furthermore, New Zealand’s exports are mostly food, demand for which tends to change less than for Australia’s iron ore and coal exports. 

The collapse in import growth sent China’s trade surplus soaring to $54.7bn versus an expected $37.0bn. The rising Chinese trade surplus is also negative for the dollar, since it increases the likelihood that US President Donald Trump will announce tariffs or other restrictions on imports from China in his State of the Union address later this month.

Today’s market

The week’s two key US economic indicators come out today:  the consumer price index (CPI) and retail sales.

Although the US CPI isn’t the inflation measure that the Federal targets, the market pays more attention to the CPI than to the Federal’s preferred gauge, the personal consumption expenditure (PCE) deflator. Moreover, although the Federal targets the core PCE deflator, the FX market reacts more to the headline CPI than to the core CPI.

The yoy rate of growth of the headline figure is forecast to slow slightly, while the yoy rate of growth of the core index is expected to remain unchanged. In other words, no sign of any acceleration in inflation.

With the US retail sales figure, the FX market’s subsequent movement is most strongly correlated with the headline figure, the “advance” number. The other two figures - sales ex-gasoline and autos and the “control” figure, which is the one that goes into calculating GDP -- have less impact. A big miss in any one of them can attract attention.

In any event, growth in retail sales is expected to slow after the sharp 0.8% mom rise in November 2017, when sales were still being boosted by the aftermath of the hurricanes (a lot of stuff got destroyed in the storms and had to be replaced). A slowdown in sales and no signs of accelerating inflation are likely to be negative for the dollar.

Philadelphia Federal President Patrick Harker and Boston Federal President Eric Rosengren also spoke quite recently (Friday 5th January 2018 and Monday 8th January 2018, respectively).

Harker expressed concern about rushing to raise rates in a way that would invert the yield curve, and said he expects only two rate hikes this year, rather than the median Federal Open Market Committee (FOMC) call for three. Harker isn’t a voting member of the Committee this year.

Rosengren hasn’t spoken specifically on the outlook for rates in some time. Earlier this week he was speaking on a panel discussion concerning inflation targeting, while in late December 2017 he warned of financial stability risks this year. The last comments he made about the pace of rate hikes was back in mid-November 2017, when he referred to “the need to continue to gradually remove monetary policy accommodation.” His comments could give USD a push upwards.

The Fundamental Analysis is provided by Marshall Gittler an external service provider of an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.

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