The US Consumer Fuels Further Dollar Gains

Where We Stand – A handy reminder was served up yesterday of one of my favourite market adages – ‘never bet against the US consumer’.

Headline retail sales rose 0.4% MoM in September, marginally beating consensus, but considerably above the 0.1% increase chalked up in August. More importantly, the control group metric rose 0.7% MoM, the fastest such increase since June, with this basket being broadly representative of sales used in the GDP calculation. Incidentally, the Atlanta Fed’s Q3 GDPNow forecast ticked higher to 3.4% annl. QoQ yesterday which, if realised, would represent the most rapid pace of economic expansion since this time last year.

Clearly, then, there should be little concern over the state of the US economy, though some on the FOMC may continue to rue their decision to push through a 50bp cut last month. This is especially true considering last week’s initial jobless claims figure having risen by just 241k, considerably below expectations, and a print which substantially reduces downside risks to the October nonfarm payrolls figure, given that the aforementioned claims number coincided with the survey week for the employment report.

On the whole, those two prints leave the ‘solid economic growth’ part of my long-running equity bull case intact, while strong bank earnings earlier in the week likely point towards a positive earnings season more broadly, keeping that component of the bull case intact as well. Sprinkle on top the continued Fed, and global, policy ‘put’, and equities should continue to march higher over the medium-term. Yesterday, despite the S&P notching a fresh intraday record high, major Wall St indices ended as near as makes no difference unchanged.

That said, with a little over two weeks to go until election day, it wouldn’t be especially surprising to see participants take some risk off the table relatively soon. In many ways, with the S&P having gained over 22% YTD, it would be foolish not to.

Elsewhere, yesterday, the aforementioned strong US data resulted in another day of broad-based gains for the greenback. The DXY notched back-to-back gains for the first time in a week, rallying to its best levels since early-August, while also rising north of its 200-day moving average for the first time in a couple of months. The buck also benefitted from a sell-off across the Treasury curve, which bear steepened, also a direct result of the earlier economic releases.

The dollar’s continued advance comes as the FX market increasingly focuses on ‘buying growth’, as opposed to trading on rate differentials, as we saw earlier in the year, with attention hence moving back to the left-hand side of the so-called ‘dollar smile’. This shift in focus has occurred as G10 central banks – ex. RBA & Norges Bank – increasingly adopt a more synchronised approach to policy normalisation, which the FOMC’s 50bp cut last month had initially seemed to derail.

Now, though, it seems most DM central banks are following the FOMC’s path in seeking to take rates back to neutral in relatively rapid fashion. The ECB duly delivered a second straight 25bp deposit rate cut yesterday, the first back-to-back rate cuts in a decade, as disinflationary progress has proved quicker than expected, and as downside economic risks continue to mount. Another 25bp ECB cut is nailed on for December, barring a dramatic – and highly surprising – turnaround in incoming data, with further 25bp cuts at each meeting until the middle of next year now the base case, until the deposit rate reaches a neutral 2% level early next summer.

While the EUR OIS curve already discounts such a path of easing, the common currency is likely to continue to face relatively stiff headwinds, in light of the dismal domestic growth outlook within the bloc. The same can be said of the pound, as apprehension grows ahead of the 30^th October Budget, while the economic outlook elsewhere in DM isn’t particularly rosy either.

Perhaps this explains the continued demand for gold. Admittedly, I’m somewhat clutching at straws here, given that the yellow metal’s chunky YTD gains have been a headscratcher for some time. I could pin the move on the strategists’ favourite narrative of ‘flows’, but I’m not quite that desperate yet. Whatever the case, gold looks to be marching towards $2,700/oz, and perhaps higher, with this not being a move I’d fancy fading just yet.

Look Ahead – A quiet day ahead, to round out a busy week.

This morning’s UK retail sales figures are the data highlight, with sales set to have fallen by 0.4% MoM in September, and by 0.3% excluding fuel. One thing worth paying particular attention to within the release is spending on ‘big ticket’ items, with any signs of consumer restraint here likely to be interpreted as a collective tightening of belts ahead of the aforementioned Budget at the end of the month.

Elsewhere, the US reports both building permits and housing starts, though neither is likely to be of particularly much interest. The same can be said of today’s Fed speakers – Bostic, Kashkari, and Waller – with all having made remarks already this week.

It might, then, be a relatively subdued Friday to close out the week, though of course with geopolitical tensions continuing to simmer in the Middle East, a pre-weekend round of profit taking and de-risking is once again likely.