In Thin Holiday Session, US Dollar Undercut by Weak CPI, Retail Sales
- US inflation readings miss across the board, confirming that gains over the past few months were driven by higher energy prices – a base effect that is soon to be absent in the data.
- Improving labor markets and record high confidence levels are doing little to underpin higher rates of consumption.
Evidence continues to pile up that the US economy had another weak first quarter. Despite the US economy being at the Federal Reserve’s definition of “full employment” and consumer confidence levels at their highest levels in nearly two-decades, consumers just don’t appear to be opening their wallets – which is bad news for forthcoming GDP data.
The Advance Retail Sales report, perhaps the best proxy for consumption in an economy built on consumption (PCE was 69% of GDP in Q4’16), missed expectations this morning. Headline retail sales came in at -0.2% m/m for March, while the February reading was revised lower from +0.1% m/m to -0.3% m/m. Conversely, the Control Group reading, which is used to compute GDP, gained +0.5% m/m versus +0.3% m/m expected, but only after the prior month reading was revised lower from +0.1% m/m to -0.2% m/m.
Perhaps the more disappointing aspect of the data today were the shifts in inflation readings. Headline CPI fell to +2.4% y/y versus +2.6% y/y expected, from +2.7% y/y in March. Core CPI came in lower as well at +2.0% y/y, missing expectations badly. Leading the slower pace of price growth was the energy input, more or less confirming that the entirety of the rise in inflation pressures the past few months was due to the pass through impact of a statistical bass effect thanks to Crude Oil.
The data comes against the backdrop of a Federal Reserve looking for more evidence that the US economy is moving along in the right direction before it announces its next rate hike. Yet today’s figures fit neatly in with the FOMC’s idea at the March policy meeting that rate hikes will be gradual this year, and that a faster pace of tightening than what was announced in December 2016 is not yet appropriate.
The data today and this week overall has had a meaningful impact on interest rate expectations, with June Fed rate hike expectations falling signficantly over the past five days. Coming into the week, Fed funds futures contracts were pricing in a 63% chance of a 25-bps by June; after today’s data, June rate hike odds are down to 57%.
Here are the data driving the US Dollar this morning:
- USD Consumer Price Index (MAR): +2.4% versus +2.6% expected, from +2.7% (y/y).
- USD CPI ex Food & Energy (MAR): +2.0% versus +2.3% expected, from +2.2% (y/y).
- USD Advance Retail Sales (MAR): -0.2% as expected, from -0.3% (revised lower from +0.1% (m/m)).
- USD Retail Sales Control Group (MAR): +0.5% versus +0.3% expected, from -0.2% (revised lower from +0.1% (m/m)).
Chart 1: DXY Index 1-minute Timeframe (April 14, 2017 Intraday)
--- Written by Christopher Vecchio, Senior Currency Strategist\
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