Market 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.
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.
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.
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.
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