Weekly Market Update 18 November – Dollar pared recent losses after hawkish statements from the Fed and upside surprises in retail sales data

Weekly Market Update 18 November – Dollar pared recent losses after hawkish statements from the Fed and upside surprises in retail sales data

 

1. Dollar pared some losses to trade around 106.5 on Friday, buoyed by upside surprises in retail sales data and hawkish statements from Fed members. Early in the week, producer prices (PPI) increased by just 0.2% in October at half of the rate from the previous month and market expectations. Similarly, Core PPI recorded 0.0% growth, reaching its lowest level since July 2020 and below market expectations of 0.3%. Existing home sales extended the 9th straight month of continuous decline since January at 4.71M for October. However, macro headwinds that seemed to indicate that inflation was slowing down for good were shaken by buoyant core retail sales data released late on Wednesday which recorded the first positive growth rate at 1.3% after 3 months of contraction, beating market expectations by 0.8%. The robust retail sales data pointed to resilient consumer spending, which was backed by recent data on unemployment claims at a stable level of 222k for October, in line with similar levels throughout the year. The prospect of a rebound in the Dollar was raised further by hawkish statements from St. Louis Fed President James Bullard who claimed that the central bank needed to increase rates to 5-5.25% given that recent tightening “had only limited effects on observed inflation”. He was backed by San Francisco Fed President Mary Daly who echoed the expectation for rates to rise to 4.75-5.25%, up from the current target range of 3.75-4%. While the rapid decline of the Dollar since the previous week may have been temporarily halted, mixed economic data has created uncertainty over whether the Greenback’s bearish bias is firmly entrenched or if it is merely retracing since peaking in September. Investors should therefore pay close attention to Flash PMI data in the coming week for insights into the manufacturing industry.

2. Pound concluded a turbulent week after mixed signals from economic data and the government ultimately saw it close higher, above 1.19 against the Greenback. Growth in average earnings for October beat market expectations of 5.9% to increase at 6.0% compared to earnings a year ago in the same time period. It has continued to remain at its highest levels in two decades, indicating further upside to consumer inflation as businesses pass spiralling labour costs onto consumers. Indeed this is reflected in CPI data which has once again exceeded market expectations of 10.7%, representing an almost continuous series of month-on-month increases since last year to reach an historic high of 11.1% in October. With inflation in the UK showing no signs of easing, this could pressure the BoE on further rate hikes to stem rising price pressures. Soaring UK inflation data juxtaposed against dampening inflation in the US bolstered the case for more aggressive tightening by the BoE which underpinned the Pound’s recovery as GBP/USD rebounded from September lows. On Thursday, Britain’s finance minister Jeremy Hunt announced a series of contractionary fiscal policies consisting of tax hikes and budget cuts in a radical reversal from the previous Truss government. The new Sunak government has pledged to tackle runaway inflation head on with a round of austerity measures that spooked traders and saw the Pound temporarily dip below 1.18 the same day. Markets were reassured later in the day when the government subsequently announced a £26 billion support package to mitigate the worst effects of the economic fallout, leading the Pound to bounce back above 1.19 against the Dollar by the week’s end. However, the Pound’s long term recovery in the wake of a weakening Greenback could be weighed down by fears of stagflation, as a -1.4% contraction in retail sales growth for October which smashed market expectations of -0.5% highlighted the risk of a looming recession.

3. Meanwhile the Euro closed only marginally higher by the end of the week above 1.036 against the Dollar. The Euro largely plateaued across the week following a rapid ascent the previous week, suggesting that demand for the currency had faltered. Recent data on German ZEW Economic Sentiment came in at -36.6, indicating a pessimistic outlook for Europe’s largest economy which could weigh down the Euro and the Eurozone as a whole. A report from the ECB further reiterated the need to control inflation rates, but also significantly revised the probability of recession in the Eurozone and UK in 2023 upwards to 80%. Although the Euro has made some recovery against the Dollar since the start of this month, macro headwinds threaten its ascent in the new year.

4. Commodity currencies pared recent losses after dipping on Thursday amidst hawkish statements from the Fed that saw the Dollar spiked. Despite retracing from the dip, Loonie still ended the week lower at 0.747, while Kiwi and Aussie ended higher at around 0.617 and 0.669 respectively against the Dollar. Quarterly wage prices in Australia rose for the 5th quarter in a row since August 2021 to grow at 1% this quarter, surpassing market expectations of 0.9%. The increase in the number of employed people was also more than doubled market expectations at 32.2k in October. At the same time unemployment rates have reached a record low of 3.4% for October. The RBA calculates that the Non-Accelerating Rate of Unemployment (NAIRU); the non-cyclical natural unemployment rate for Australia, to be 4.25%. Unemployment in Australia has consistently declined below this figure over the course of the year since January, indicating that the tightening labour market is leading to higher wages and price growth inflation. Similarly in Canada, CPI for October increased by another 0.7%. However data for y/y trimmed CPI which excludes the prices of volatile goods and y/y median CPI came in at 5.3% and 4.8% respectively, perfectly in line with market expectations and markedly lower than the peak around the middle of the year. This added further confirmation that rising inflation in Canada had reached its peak and could be experiencing a reversal, accounting for the poor performance of the Loonie this week compared to the other commodity currencies.

5. Crude oil extended its decline to fall below $87 per barrel by the end of the week on the back of weakening global demand. Despite fears concerning the ban on Russian oil when EU sanctions enter into force in December, recent data indicates that European oil refineries had overbought during panic purchases at the height of the energy crisis that saw imports from Latin America, the US, and Iraq skyrocketed significantly above average compared to previous years and subsequently taper down. Demand for oil was further blighted by a recent round of tightening covid restrictions in China, which worsened the outlook for energy consumption in the ailing economy. The International Energy Agency have thus trimmed their expectations for oil in 2023 and forecasted oil demand growth to slow by 25% to 1.6m barrels per day, which could weigh down the price of oil even amidst the risk of further supply cuts from OPEC+. Meanwhile Gold pared recent gains to weaken towards $1740 per ounce on Friday, ending nearly 3 weeks of rapid ascent. The dollar-denominated asset remained at the mercy of a stronger greenback, following hawkish statements from the Fed indicating that interest rates could be hiked beyond 5% to combat inflation. Higher interest rates prospects also dampened the appeal of holding the non-yielding bullion.