US December Retail Sales are taking center stage

Markets

US yields yesterday started a catching up move after the rise in Germany on Monday. Contrary to last week, a poor NY Empire manufacturing survey this time was no pretext to push yields back lower. On the contrary, US yields were propelled higher by comments of Fed’s Waller as he provided a detailed analysis of the Fed’s rate strategy going forward. Waller acknowledged that the pieces are falling in place for the Fed to gradually start cutting rates this year. However, the process should be deployed ‘methodically and carefully’. In this respect, he tempered markets’ aggressive rate cut expectations. “With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past”, he was quoted. He also indicated that it is reasonable to start thinking about slowing the pace of the balance sheet runoff. US yields extended their intra-day rise post Waller, closing between 7.5 bps (2-y) and 12 bps (30-y) higher. Spill-overs from the US also help German yields back into positive territory. In a steepening move, the 2-y yield closed little changed, but the 30-y added 3.0 bps. Equities stayed in the defensive (S&P -0.37%). The rise in US real yields also supported the dollar. DXY set a now 2024 top (close 103.35). EUR/USD extensively tested the 1.0877 support (close 1.0875).

This morning, the combination of higher US yields and poor Chinese data (cf infra) is causing an outright risk-off positioning on Asian market. The dollar profits. EUR/USD declines further to 1.086. USD/JPY extends its sharp rally (USD/JPY 147.75). US yields maintain yesterday’s rise. Later today, the US December retail sales are taking center stage. Monthly sales growth is expected at 0.4% M/M (0.2% for the control group). We look out whether markets keep Fed’s Waller’s assessment in mind that there is no reason to rush to aggressive rate cuts as US activity data continue to show resilience. Of course, the risk-off sentiment might hamper a further rise in (US) yields. Even so, the US 10-y yield sustainably returning above 4.10% indicates that the bottoming out process is finding more solid ground. The USD momentum is also improving further. EUR/USD 1.0724 (Dec low) is next target on the charts. This morning, the UK inflation brought a material upward surprise, suggesting that there is still a lot of work to do for the BoE. Headline inflation rose 0.4% M/M and 4.0% Y/Y (from 3.9%). Core inflation was unchanged at 5.1% (VS 4.9% expected). Services inflation also remains stubbornly high at 6.4% (from 6.3%). The report clearly shows that any speculation on the time of BoE rate cuts is very premature. Sterling rebounds after the data. EUR/GBP drops from 0.8615 back to the 0.86 big figure.

News and views

China’s economic growth hit the 5% target in 2023. Official numbers released this morning showed the economic number two in the world expanding 5.2% y/y while ending the year with 1% quarterly growth. Hitting the government target was made easier by 2022’s low comparison base. Separate December data indeed show the Chinese economy is still struggling to recover from a housing and consumer confidence slump. Residential property sales fell 6% for the whole year compared to 2022 and home prices declined at the fastest monthly rate (-0.45%) since 2015. Retail sales came in at a disappointing 7.2%. In addition, the jobless rate for the first time in five months picked up in December, from 5% to 5.1%. Industrial production extended a recovery that began early last year (4.6% YtD y/y) while fixed investments showed tentative signs of bottoming out after a year’s long decline. They are only faint spots that won’t ease calls for additional fiscal stimulus, especially as the government is rumoured to set a growth target between 4.5-5% for this year at the March National People convention. Monetary support is also seen as upcoming, even as the PBOC earlier this week defied expectations for a 10 bps cut to its one-year lending facility rate. China’s yuan is holding steady after the publication of the figures. USD/CNY is testing resistance at 7.20.

Early indicators from a Swedish private data company showed that housing construction started weakening again towards the end of 2023. Coming ahead of official data, the series showed new home construction fell by 4.7% m/m in December while readings of the previous months were revised lower. That brings the total decline from the peak in August 2021 to 68%. The numbers followed a couple of months which suggested the market was more or less stabilizing. Swedish housing faced a deep rout after the central bank sharply raised interest rates to fight inflation. Some 75% of homeowners have mortgages with variable rates, leading to a fast pass-through of monetary policy.

Download The Full Sunrise Market Commentary