A more risk-supportive tone is evident across currency markets this morning after Treasury Secretary Yellen said debt ceiling negotiations were making progress. Speaking on the sidelines of the G7 finance minister meeting in Japan, she said “I’m hopeful. I think the negotiations are very active. I’m told they have found some areas of agreement”. Treasury yields and equity futures are up, and most major currencies are advancing against the dollar.
The cadence of economic events will slow this week, with a string of central bank speakers competing with second-tier data releases in Europe and Asia for market attention.
Today’s Federal Reserve speakers include Atlanta’s Bostic, Chicago’s Goolsbee, Minneapolis’ Kashkari, and Governor Cook. All are likely to reiterate a commitment to data dependence even as they acknowledge nascent signs of slowing demand.
This evening’s raft of Chinese activity data should look impressive on a year-over-year basis, with last year’s zero-Covid policies generating favourable base effects. Retail sales might jump as much as 30 percent from a year prior, while industrial production and fixed asset investment show circa-7-percent gains. But month-over-month momentum should slow, with Western demand and post-lockdown “revenge spending” fading even as government stimulus efforts ramp up.
Tomorrow’s UK jobs data should show the unemployment rate holding at 3.8 percent in the first quarter, with year-over-year wage growth accelerating to 6.8 percent from 6.6 percent. Japan will publish its latest growth and inflation numbers later in the week, and Australia will also deliver a wage price update.
Tomorrow’s US retail sales report could be the week’s most critical release, with sub-headline details helping inform market views on the strength of American consumer demand. Higher gas, food, and auto prices could lift overall receipts to a 1-percent gain, but with recent data showing a sharp deterioration in sentiment among households and small businesses, sales in other categories might retreat in a meaningful way. We note that retail sales are generally considered a leading or coincident indicator – as opposed to payroll numbers or corporate profits, which tend to lag the economic cycle.
More generally, we suspect the dollar will remain relatively well-supported until the debt ceiling impasse has been resolved. Despite the recent surge in ill-informed “dollar demise” narratives, the global financial system remains incredibly dependent on the greenback, and market participants – from large, cross-national financial institutions down to smaller businesses – tend to prize dollar liquidity during periods of turmoil, even when the epicentre is in the US. Many of those seeking to hedge themselves against a shock are likely to bulk up on dollar holdings, and directional positions favouring other currencies – most notably the euro – should come under pressure.
Once a deal has been reached, however, all bets are off.