Monday, June 17, 2019

US Retail Sales indicate that consumer demand is still positive, will the Fed care though?

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MORNING BRIEFING

A very busy week filled with fresh key data and central bank meetings lies ahead of us with investors eager to find out what’s next for currencies and equities alike. The Dollar starts the week on a high note following the robust US retail sales report on Friday which indicated that consumer spending is faring relatively well in the States. The European currencies were under pressure by the rallying greenback while the fluid risk sentiment kept traders looking for safer options rather than opportunities in the Euro and the Pound. Gold eased off its highs on the back of the strong US data but equities ended the week marginally in the red.

The speculation surrounding the Fed’s next move in regards to interest rates has been the “talk of the town” among traders and economists over the past few weeks. With US data coming in bearish more often than not, many market participants have been calling for the Fed to ease its monetary policy and President Trump has been championing lower rates for some time now. If the Fed does believe that domestic growth is indeed slowing down to such a degree that lower interest rates are needed to sustain the expansion of the economy, then they would have to communicate their decision to act ahead of time to avoid an overly volatile market reaction when they pull the trigger.

With July being the most likely time for the US central bank to start its easing cycle - should they decide to do so - this month’s meeting, scheduled for Wednesday, could be used to prepare the market in that regard. The question though is: should the Fed be considering a rate cut at this point? This is clearly not an easy question to answer. Domestic growth has been slowing down without a doubt over the past few months, both on the back of the trade war with China but more importantly due to the US entering their late cycle phase.

We’ve seen evidence of this in several parts of the economy, with the labor market figures being the most recent warning sign. On the other hand though, Friday’s US retail sales data provided those claiming that it’s far too early to introduce rate cuts with an important argument: consumer demand printed strong this time around but more importantly, April’s disappointing figures were revised sharply to the upside. So, in contrast to what we mentioned in our Friday note, we cannot claim that retail sales have printed badly three times in the last five months anymore as, following the revisions, four out of the six last reports indicated positive demand.

Is that enough to ease investors’ worries in regards to the US’ growth rate and keep the Fed on pause? It’s hard to say but it definitely makes this week’s FOMC meeting a key event to watch. The Fed Fund futures remained relatively unchanged though following the overall positive retail sales report, with the CME FedWatch tool still indicating an 84% chance that the US central bank will cut rates in July. So Powell’s comments after the meeting will be key in assessing what the US policymakers are thinking: if he spends more time talking about the robust parts of the economy, then the Dollar will continue moving higher but if he stresses that “the Fed stands ready to act” then the greenback will sell off as investors will start preparing for a lower rates’ regime.

During the early part of the week and up until the meeting on Wednesday, we expect the Dollar to remain well bid. There’s little reason for traders to go on the defensive at this point, as those expecting a series of rate cuts would have already positioned accordingly. Moreover, it makes more sense for those sitting on the fence to err on the side of an unchanged policy after the US retail sales report so we should see the greenback to remain well supported, if not extend its recent gains.

Gold is seeing a bearish start to the week with prices dropping below the $1,340 level as the Dollar is pushing higher. From a technical perspective, this is an important short-term support and if the US currency continues to move the upside on the back of the positive retail sales data then this level would come under threat. The next area of interest is found around the $1,332 mark and with Treasury yields climbing above 2.10% again this morning we may see further weakness for Gold in the near term.

Finally, equities are pointing higher this morning with futures on both sides of the Atlantic trading in the green. Friday’s consumer demand figures were a positive boost to the US stocks and more importantly, the revision to April’s data suggests that the US consumer is still in good health. As such, we should see stocks retaining their bullish bias in the interim with investors looking towards the FOMC meeting to provide the next catalyst: if the Fed indicates that rate cuts should be expected soon, then stocks will continue trending towards their recent highs.

MARKET EVENTS TO WATCH

  • US NAHB Housing Market Index - 6pm
  • Draghi Gives Opening Remarks at ECB Forum in Portugal - 9pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research