- Rates: Can core bonds profit from increased uncertainty?
Dreadful US retail sales pushed core bonds higher yesterday. A new government shutdown will be avoided but US President Trump plans to declare a national emergency to obtain more funds. Trade optimism fades as both parties report few signs of progress. Today’s US sentiment gauges can pile on investor worries/uncertainties. Safe haven flows might be in play. - Currencies: USD declines on poor US retail sales, but EUR/USD rebound unconvincing
The dollar was hammered on awful US December retail sales. EUR/USD rebounded, but the technical picture remains fragile. EUR/USD gains will probably remain difficult as long as issues of global/EMU event risk aren’t solved or unless EMU eco data improve. A risk-off context probably doesn’t help the euro.
The Sunrise Headlines
- Awful December retail sales weighed on US equities. Nasdaq barely managed to eke out gains but the S&P and DJI finished in red. A trade talk reality check pours cold water on the recent Asian equity rally. China underperforms.
- US president Trump plans to declare a national emergency to secure more funds for the border wall, after signing a spending bill that avoids a new government shutdown. Democrat House Speaker Pelosi considers a lawsuit.
- Chinese consumer inflation in January slowed for a third straight month to 1.7% YoY (vs. 1.9% expected), the weakest in more than a year. Producer prices increased at the slowest pace since 2016 (0.1% YoY vs. 0.3% anticipated).
- The US and China said that both parties remain far apart on structural reform demands. The report suggests little progress has been made during this week’s trade talks in Beijing despite recent overall constructive tone.
- British Parliament rejected May’s plea for more time to renegotiate the Irish backstop in Brussels. The vote, however, is non-binding. May will continue EU talks and provide Parliament with an update on February 27.
- Spain’s Socialist Prime Minister Pedro Sanchez might call snap elections this morning as he called an extraordinary cabinet meeting. His budget proposal was blocked by Parliament earlier this week.
- On today’s eco calendar, the US prints the Empire Manufacturing Index and U. of Michigan consumer sentiment gauge. The UK publishes retail sales (Jan). China’s president Xi Jinping joins discussions with Lighthizer and Mnuchin.
Currencies: USD Declines On Poor US Retail Sales, But EUR/USD Rebound Unconvincing
Dollar rally blocked by poor US retail sales
The focus for FX/USD trading turned to the US on Wednesday. At first, euro weakness/USD strength still reigned. German/EMU growth data were again week and EUR/USD (re)tested the 1.1250 area. However, fortunes for the dollar changed as December US retail sales printed at an awful -1.2% M/M. US yields and the dollar fell off a cliff. In a market looking for clear direction, EUR/USD finally finished at 1.1295 (from 1.1261). USD/JPY closed at 110.48 (from 111.0). Overnight, Asian markets are pondering the meaning of the poor US retail sales. The headlines on the US-China trade talks are now seen as indicating that the glass is half empty rather than half full (parties say they are still quite far apart). At the same time, Chinese price data remain soft and the US budget solution isn’t that comforting. Asian equities show broad-based losses up to 2.0% (Hong Kong). The (trade-weighted) dollar is trading off yesterday’s top, but the loss remains modest (97.05 area). USD/JPY (110.35 area) extends yesterday’s postretail sales decline. EUR/USD hovers slightly below the 1.13 handle.
Today, the US Empire manufacturing survey, US production data and consumer confidence of the U. of Michigan will be released. The Empire manufacturing and Michigan confidence are expected to improve after a substantial decline last month. In a broader perspective, markets will become more alert for US data after yesterday’s shocking retail sales. Unconvincing data will probably affect risk sentiment first. The impact on the dollar is less obvious. USD/JPY is vulnerable in case of more negative news. We doubt that EUR/USD will be able to start a sustained rebound if global risk sentiment remains ‘instable’, even if it is (partially) due to US data. The advice of the Commerce department on auto import tariffs (expected this weekend) is an additional source of uncertainty for Europe and the euro. This week, the dollar rally showed signs of hesitation, but the picture especially for EUR/USD hasn’t materially improved yet. Even with softer US data, a real euro rebound probably needs some of the global/EMU event risks to be solved and better EMU data. This condition isn’t met. EUR/USD 1.1216 marks the Nov low. EUR/USD 1.1287 is 61% retracement 2016 low/2018 top).
Sterling (EUR/GBP above 0.88) traded in the defensive from most of the day as investors looked out of a new Brexit vote in the UK Parliament yesterday. May lost the (non-binding) vote, undermining her mandate to renegotiate the Brexit deal. So, more political muddling through will probably continue. We stay cautious on sterling as long as there are no indications on an delay/rising chance for an orderly Brexit
EUR/USD: dollar declines on poor US retail sales but euro rebound remains unconvincing
