Daily Brief

Will Inflation impact Retail Sales?

The dollar wobbles into the close

After the inflation-gate meltdown for markets during the middle of the week, last week actually finished on a slightly more positive footing across the board. A hard-earned comeback for equities by the close of play on Friday evening helped to boost the bullish narrative. The dollar therefore succumbed, and currencies echoed a modicum of comebackability versus the greenback. As a consequence, the dollar index slipped back to 104.50, having flirted with a break over 105.00 for the first time in this cycle earlier in the day. A much weaker than expected Michigan Consumer Sentiment report (May), which slipped to an 11-year low below 60.00, having been expected to only dip from 65.2 to around 64, played its part in reminding markets that the path ahead for the U.S economy will be long and winding at times.

Retail Sales and Powell the key

Tomorrow’s U.S (Apr) Retail Sales report, and a speech from Fed Chair, Jay Powell, are the ones to watch for this week. Whilst it will be interesting to see whether the high ongoing inflation in the U.S did translate into weaker Retail Sales growth, the latest consensus expectations are actually forecasting a 0.7% gain, which would be up from 0.5% (MoM). However, if you take cars and trucks out of that number, the increase may only be around the 0.3% region. That is due in part to the recent change in methodology for the autos component, which was evidenced in last week’s inflation report.

Higher Oil prices and a resurgent consumer are still expected to drive the headline boost. There is also no ongoing adjustment for inflation to the individual components within the report, which may keep everything frothy for the time being. Given the broader concerns on the global growth outlook of late, any relative softening of U.S data will leave markets tying themselves up in knots on future rate hike expectations, which have moderated a touch themselves over the past week.

UK Inflation

The latest inflation figures for the UK are likely to have a big impact on the pound’s fortunes for this week. Annual CPI inflation hit a 30 year high of 7% in March, driven by those persistently high energy prices. Sadly, that number doesn’t look like easing anytime soon, with an eye-watering 9.1% increase expected through April. Inflation is therefore rapidly heading towards those 10% levels that the BoE mentioned could be forthcoming, during their latest MPC meeting just a couple of weeks back. This month’s number is especially vulnerable to upside surprises, given that the Ofgem energy price cap was increased by 54% during April. Things could therefore get a bit messy, especially at a time when growth in the UK has slowed to a snail’s pace, confirming that the cost-of-living crisis is accelerating rapidly.

What about the pound?

GBP/USD moved as low as 1.2155 earlier on Friday, but did manage to claw back 100 pips by the close, in-line with the broader dollar sell-off elsewhere. GBP/EUR is nearing 1.1800 once again, having tapped 1.1600 for a brief spell last Thursday. With EUR/USD at 1.0400, despite the ECB’s recent admission of an impending rate hike in July, the single currency is currently marginally weaker than the pound, which is reflected by that GBP/EUR bounce.

Oil and the Loonie

USD/CAD finished the week at the low, moving back to 1.2900 after piercing 1.3000 on multiple occasions earlier in the week. The combination of rising Oil prices and a weaker greenback the main factors behind the move here. We look to this Wednesday’s Canadian inflation data, which may show a slight softening (MoM), for clues as to the future path on rates from the BoC. The latest growth figures for the region (Tuesday) will be closely scrutinized.

What else is happening today?

In the UK, the BoE Monetary Report Hearings are taking place. Euro-area Trade Balance, Canadian Housing Starts as well as the latest Manufacturing & Wholesale Sales complete the line-up.

 

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