Weaker US data starting to validate Fed’s more dovish stance

-->Weaker US data starting to validate Fed’s more dovish stance; US said to weigh 60 day extension of tariff date 

• A sharply weaker US retail sales report for December (delayed release due to the US government shutdown) sees the headline print fall -1.2% versus +0.1% expected and ex auto and gas decline -1.4% versus +0.4% forecast while the important control group drops -1.7%, the lowest level seen since 2011. This group excludes food services, car dealers, building-materials stores and gasoline stations. The weak December sales report follows two strong prior reports  and it may be prudent to wait for the January report before getting too concerned. Nevertheless, the largest monthly drop in the retail sales control group since September 2001 is certain to reinforce the current Fed “pause” as Fed Governor Brainard last night suggests when he says “downside risks have definitely increased”.            

• US – China trade headlines remain risk positive and lessen demand for safe haven USD. A headline overnight saying “US-China trade teams said to be far apart on reform demands”  may well be consistent with earlier reports of a 60 day deadline extension to allow for more talks.          

Combination of weaker US activity data and subdued inflation  likely to see the Fed on hold for (at least) first half of 2019

• The sharply weaker US December retail sales report (albeit ancient history) does challenge the standing market view that the US consumer has been quite insulated from evolving downside growth risks. Indeed, USD data outperformance so far has been partly driven by the US consumer but results of the December report potentially leave investors in doubt as to if this will continue.

• Combine this with the modest increase in US core PPI overnight that implies still-subdued core PCE even if there is some modest evidence of price-pressures from tariffs, particularly in some capital goods, and the combination of weaker real US activity data and subdued inflation makes it very difficult for the Fed to consider further tightening for at least the first half of 2019. Bottom Line - while US December core PCE has yet to be released due to the government shutdown, if Citi’s 0.17%MoM expectation is met, core PCE should fall to 1.8%YoY in January.

European growth underperforms, Germany avoids recession; PM May’s defeat overnight changes nothing of substance               

• Germany narrowly avoids falling into a technical a recession in H2 2018 with Q4 growth flat at 0.0% (vs 0.1% consensus expectations) and euro zone Q4 growth of just 0.2%QoQ on a seasonally adjusted basis. With Q4 weaker than the statistical office had initially estimated in January, Germany’s full year GDP growth estimate edges down from 1.5% to 1.4% with investment the savior – up in 4Q, especially in construction, but also in machinery and equipment (“business investment”). Private consumption growth is slight but government spending rises significantly while net exports are neutral, with exports and imports rising at the same pace. 

• GBPUSD trades heavy towards 1.2770 following the non-binding Brexit vote in the UK parliament overnight that sees PM May defeated by a margin of 303 versus 258 in the House of Commons on her Brexit motion. The defeat however changes nothing of substance though it potentially undermines confidence in Brussels and EU capitals about whether any concessions from them would actually secure a majority for a Brexit deal. PM May will still continue to negotiate with Brussels and work towards the next Meaningful Vote in the Commons - currently slated for February 27/28. And despite PM May’s overnight setback, there still does not seem to be any appetite for a “No Deal” Brexit in the UK Parliament or a willingness of government to actively pursue it.

Real money buyers active in NZD & AUD post the “not so dovish” RBNZ statement

• With Governor Orr throwing cold water on dovish expectations in the meeting Wednesday, saying the statement does not imply chances of a rate cut have increased, NZD and AUD are the biggest outperformers overnight (up 0.56% and 0.23% vs major currencies, respectively) as the macro focused real money accounts step up their buying post the RBNZ statement.   

Asia EM: China requests extension of trade talks     

• China requests an extension of trade talks with the US beyond a March 1 deadline, with the intention of finalizing a deal later at a meeting between Presidents Xi Jinping and Donald Trump (MNI). Officials have not yet discussed specific language for a draft agreement but both sides appear to be moving towards making concessions, with the U.S. government realizing it will be unable to obtain all it wants in the current 90-day negotiation period while China shows willingness to further accelerate the process of opening up its markets and to increase purchases of U.S. goods and services.

• Sources also note that Trump has been advised by U.S. officials not to come to China to meet with Xi in case this jeopardizes what the U.S. perceives as a negotiating advantage. But China wants to proceed to direct talks with Trump, for fear that he might otherwise overturn agreements reached between the negotiators. The Chinese government has offered to open up its financial sector more quickly, especially for life insurance companies. But the U.S. government is pushing China to further reduce requirements for joint ventures and to accelerate licensing processes for foreign financial service companies.

This is an extract from the Daily Currency Update, dated 15th February 2019. Please approach a Citigold Relationship Manager if you would like more information