Macro/FX Watch: Strong beat in US and China consumption but outlook still uncertain

Macro/FX Watch: Strong beat in US and China consumption but outlook still uncertain

Forex 5 minutes to read
Charu Chanana

Chief Investment Strategist

Summary:  Strong US data brought a fresh sell off in bonds and a hawkish shift in Fed expectations, but the spillover to USD remained limited. Focus remains on Powell’s speech and Biden’s Israel visit. Meanwhile, China consumption also surprised to the upside but momentum remains weak and unlikely to result in sharp CNH appreciation. Mixed UK data could tie BOE’s hands, and opens room for dovish reprising and pressuring GBP.


Key points:

  • Hot US retail sales suggests Q3 GDP data could remain strong
  • Consumer weakness is, however, still likely to come
  • Fed rate hike bets have picked up, but Fed will likely stay on hold amid economic and geopolitical uncertainty
  • Dollar still supported, with upside getting harder to come by
  • Biden’s Israel visit and Powell’s speech will be in focus
  • CNH appreciation could be short-lived as China’s momentum remains weak
  • Sterling at risk from dovish repricing of BOE

USD: Not much of a bid from retail sales jump            

US retail sales showed a strong jump for September, smashing analyst estimates. Headline retail sales were up 0.7% MoM vs. 0.3% expected, and the core control measure which feeds into GDP was 0.6% MoM vs. 0.1% expected. August data was also revised higher, and this is suggesting that US GDP for Q3 could touch about 4% levels. Car sales boosted the headline, but even excluding cars and gasoline, sales were up 0.6% MoM from 0.2% previously. But also boosting the retail sales print were some of the temporary factors such as retailers clearing out summer inventories and demand for back-to-school items. Industrial production also came in above expectations, coming in at 0.3% MoM vs. 0.0% expected. The overall data beat led to a sharp surge in short-end Treasury yields, boosting the probability of another Fed rate hike this year close to 50%. Market also continues to pare back rate cut bets for next year, with just over 2 rate cuts left in the curve for 2024. DXY however only got a knee-jerk reaction on the retail sales beat, moving higher to 106.97 before reversing to ~106 handle later in the session.

We continue to believe the US consumption remains driven by temporary factors, and economic momentum could decelerate quickly with the consumers running out of savings and maxing out credit limits, while the labor market is also starting to weaken. September PCE data is still to come ahead of the next Fed meeting, and that could also relay the hot CPI message. Does that mean the Fed could hike again? We remain of the view that the Fed will remain on the sidelines, keeping rates unchanged, amid the economic and geopolitical uncertainty. But what we could still get is a hawkish undertone in the press conference given the fresh supply risks amid the ongoing Middle East crisis.

Focus still on geopolitics, as well as a host of Fed speakers in the week ahead including Powell on Thursday who may maintain a neutral tone given the uncertainties. If Powell talks on the line of his peers who have recently talked down the need for another rate hike due to the tightening of financial conditions given the surge in long-end yields, that could take down the Fed rate hike probability considerably, and bring DXY lower to test October lows of 105.50 and EURUSD could surge above 1.06. Geopolitical tensions are also on the rise again, following an attack on a hospital in Gaza and the scheduled Biden visit to Israel. Any escalation would push DXY back above 106.50 and send other safe havens such as CHF, JPY and Gold higher.

Market Takeaway: Two-way risks for US dollar from here as US economy stays hot but likely to deteriorate and geopolitical developments adding to the volatility. Range trading likely between 105.50-107.50 for the DXY index.

 

CNH: China data outperformance cannot overturn the weak momentum

China’s Q3 GDP and monthly activity numbers showed some further firming, confirming the pickup seen earlier in PMIs. Q3 GDP came in at 4.9% YoY vs. 4.5% expected but slower from 6.3% YoY due to base effects. On a QoQ basis, growth was up 1.3%, coming in better than 0.9% expected and 0.5% prior. Most notable was the improvement in retail sales which jumped to 5.5% YoY in September from 4.6% YoY previously, comfortably beating the 4.9% YoY expectation. Industrial production growth remained unchanged at 4.5% YoY while the fixed asset investment growth slowed to 3.1% YoY YTD from 3.2% in August. The property sector overhang in China could still keep the consumer and investment confidence weak, suggesting a bumpy recovery ahead. Adding to downside risks are also the expanded US chip curbs and a deteriorating global growth outlook.

USDCNH slid from 7.3250+ levels to touch lows of 7.3047 on the data dump, but gains in yuan remained fleeting as pair reversed back higher to 7.3150 later in the session. Given the growth and policy divergence between US and China, it remains hard to envisage a recovery in yuan until USD starts to weaken. The clock is still ticking for Country Garden to avert its first default on dollar bonds.

Market Takeaway: Optimism on Chinese economy could continue to build into the end of the year, so further depreciation of the yuan could remain more measured. But a recovery will have to wait for the USD weakness to set in given negative carry for the yuan.

 

GBP: Weakness in payrolls could accelerate quickly

UK wage data growth came in below expectations at 8.1% YoY vs. 8.3% expected and 8.5% prior. September payrolls data also showed a fall of 11k in new jobs and suggests that UK wage pressures could be cooling at a quick pace. September CPI today however came in a notch above expectations at 6.7% YoY vs. 6.6% expected. Core inflation was also marginally ahead of expectations at 6.1% YoY from the 6.0% estimate. Contrasting data could mean that Bank of England will have to stay on hold, and more divisions on the board could be likely. Further rate hikes remain unlikely given that inflation is cooling and below BOE’s own expectation, wage growth is also cooling, and October inflation could see a large drop as base effects underpin.

Markets still price in another BOE rate hike for this year with about 50% probability, suggesting room for dovish repricing as further data is released. GBPUSD is currently hovering around the 21DMA at 1.22 and trendline resistance is seen at 1.2250. Break above 23.6% retracement at 1.23 will be needed to confirm a short-term uptrend.

Market Takeaway: Despite a firm inflation, GBP downside persists with wages cooling. EURGBP has scope to move towards 0.87 amid risks tilting dovish for BOE. GBPNZD could also be interesting given the divergent growth profiles of UK and NZ.

Source: Bloomberg

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.