Wednesday, January 15, 2020

December’s CPI reinforces Fed’s economic outlook, but how will today’s phase one agreement affect the US economy?

Tags
  • China
  • Dollar
  • US Retail Sales
  • DXY

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Analysts’ Pick: December’s CPI reinforces Fed’s economic outlook, but how will today’s phase one agreement affect the US economy?

  • Dollar Index looks likely to inch higher after US-China phase one trade agreement
  • Declining auto sales will weigh on December’s retail sales, but will likely be boosted by late Thanksgiving holidays
  • January’s preliminary estimate for consumer sentiment to face downward pressure from military action in Iran

Yesterday's inflation data release was slightly lower than economists' estimates but still supported the Fed's overall economic outlook. CPI for December rose 0.2% month-on-month and 2.3% year-on-year while the core CPI grew 0.1% month-on-month and 2.3% year-on-year. The inflation data had little effect on the Dollar Index and was eclipsed by the latest report on the US-China phase one trade deal saying that US tariffs on US$360bn worth of Chinese imports will continue until the November elections.

DXY remained little changed as December’s inflation reinforced Fed’s outlook

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The US-China phase one trade deal will likely lift pressure off global growth in the short-term. Investors will be focused on the details of the agreement and in particular will look out for areas on intellectual property protection, which has been the reason why the US started imposing tariffs on China. After yesterday's report from Bloomberg and statement from US Treasury Secretary Steven Mnuchin, the market now expects US tariffs on US$360bn worth of Chinese imports to continue through 2020 or until a phase two agreement as well as roughly an additional US$180bn worth of purchases from China on American goods.

While the US wants China's commitment to implement stricter intellectual property rights, China has little incentive to do so as the costs are likely to outweigh the benefits in a country that probably still has room to develop, especially in the less developed cities in China. This means that China is unlikely to be pressured into accepting change of policy demands from US. But certain policies are likely in China's interests, such as eventually opening up its domestic market to international companies and being less manipulative on its currency.

December's retail sales dataset is likely to be dragged down by auto sales, although retail sales should still be expected to be higher than November's 0.2% growth. Total vehicle sales in the US for December fell to 16.70m, i.e. a 2.28% decline from November and will likely drag on December's retail sales data, although an estimated 2.8% seasonally adjusted increase in prices for retail gas should balance out the effects of declining auto sales in December. With 2019’s thanksgiving holiday later than usual, some retail sales during the Black Friday weekend may have spilt over into December. Expect retail sales ex auto & gas to grow more than November as a result, although is unlikely to beat estimates for a 0.4% growth.

Vehicle Sales is likely to continue to weigh on the retail sales dataset for December

2019 June July August September October November December
Retail Sales 0.4% 0.7% 0.6% -0.4% 0.4% 0.2% -
Vehicle Sales 0.0% 2.8% 0.9% 1.3% -3.7% 3.3% -2.3%
*Source: Bloomberg

January's preliminary consumer sentiment index estimate is likely to miss expectations thanks to the conflict between the US and Iran earlier in the month. The military actions by both countries will probably weigh on consumer sentiment as has been observed historically. The dollar is likely to suffer as a result. But the final estimate later in the month will likely rebound closer towards economic forecasts of 99.3 if the conflict between the two countries do not escalate further.

Consumer sentiment declined after the 9/11 attacks and at the start of the 2003 invasion into Iraq

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We expect the Dollar Index to rise slightly to 97.50's level on the announcement of the phase one trade agreement as the US will likely emphasise its position in getting a phase one trade deal and pushing for prospects that US-China relations are progressing towards a full trade agreement. But on Friday, expect DXY to weaken as consumer sentiment is likely to disappoint, possibly by as much as 0.21% on the release of the data. The greenback should remain little changed on the release of the retail sales data, unless retail sales ex auto & gas largely misses expectations. But if consumer sentiment does better than expected, the dollar is likely to end the week stronger, and will likely gain as much as 0.27% on the release of the results.

 

Scenario

Effect on DXY

1 US phase one trade agreement within expectations; retail sales miss estimates; consumer sentiment misses estimates Rise on signing of phase one trade agreement to 97.50; remain little changed on release of retail sales data; fall by 0.21% level on release of consumer sentiment survey results
2 US phase one trade agreement less comprehensive than expectations; retail sales miss estimates; consumer sentiment beats estimates Rise on signing of phase one trade agreement to 97.16; remain little changed on release of retail sales data; gains by 0.27% on release of consumer sentiment survey results
3 US phase one trade agreement within expectations; retail sales miss estimates; consumer sentiment beats estimates Rise on signing of phase one trade agreement to 97.50; remain little changed on release of retail sales data; rise by 0.27% on release of consumer sentiment survey results
*Source: ADSS

Technical Analysis:         

DXY

The DXY remains little changed since the beginning of the week as bulls and bears fight over possession of the index. RSI indicates that buying and selling is balanced while MACD signals that DXY is on a temporary uptrend. But expect movement from the greenback as the US-China phase one trade deal gets signed, which will likely push the Dollar Index higher towards 97.50. If bulls manage to break that resistance level, then expect momentum to bring the index towards the 38.2% Fibonacci retracement of 97.62. Although, bears will likely rejoice at the end of the week as consumer sentiment may possibly disappoint the market, which will likely put pressure on DXY on Friday. If consumer sentiment disappoints, expect the bears to push the dollar past the initial support of 97.26 and test 97.16’s level.

Support: 97.26 / 97.07 / 96.92

Resistance: 97.50 / 97.60 / 97.77

DXY Chart (D)

 

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