Lacklustre US data puts investors on their toes
The last batch of US data came on the soft side and called into question the actual Fed’s rate path. Indeed, inflationary pressures eased for a third month a row in April with headline CPI printing at 2.2% and the core one, which excludes the most volatile components, moving below the 2% threshold to 1.9%.
April’s retail sales were also weaker than expected as the main measure missed the median forecast of 0.6%m/m to print at 0.4%. Core retail sales rose 0.3% m/m versus 0.5% expected and 0.3% in the previous.Even though the data may just signal a temporary slowdown of the US economy, it definitely ruled out a strong economic rebound in economic activity.
With President Trump’s reforms failing to materialise and weaker than expected inflation, the market is readjusting expectations for the pace of monetary tightening. The entire US treasury yield curve shifted lower on Friday and dragged the greenback down. The dollar index is down 0.66% since Friday and continued to move south on Monday morning.
The single currency and the Swiss franc partially erased last week’s losses and rose 0.75% and 0.83% respectively over the last two trading days. With the June rate hike already priced-in and assuming that Trump’s fiscal plan gets delayed further, we believe that the risk is mostly on the downside for the dollar for now.
SNB’s massive intervention continues
During the French Presidential elections, it was clear that the Swiss National Bank was selling franc to prevent any safe haven effect. Uncertainties regarding the outcome (at least before the first round) drove the Swiss institution to intervene massively.
The Swiss currency is now back on the US Treasury watch of currency manipulators and the Finance Ministry declared that the Central Bank is only trying to limit the overvaluation from the franc and not gain a competitive advantage, which is – in the end – the same thing. It is becoming tougher for the SNB to convince markets about the exact nature of its intervention.
The Swiss foreign exchanges are now larger than the Swiss GBP and today’s total sight deposits have largely increased by 2 billion CHF. We continue to be bullish on the CHF as upside pressures on the currency should continue. Datawise, the trade balance is still largely positive and is even increasing.
Next week, export data for April will be released and they are expected to print at a great + 2.5% m/m (out of inflation) while imports should continue to decline. It is clear that the Swiss economy resists well, which leaves some room for the SNB to intervene.
China see marginal data weakness
Data from China came in on the softer side but after a significantly strong 1Q print. However, there are further indications that growth in China will continue to moderate. Chinese retail sales rose to 10.7% y/y against 10.8% expected, indicating that consumption remains solid. Fixed asset investment increased 8.9% y/y against 9.1% expected while industrial production slipped to 6.5% y/y against 7.0% expected.
Overall, these reads are consistent weaker trade data and softer April manufacturing PMI. While fixed asset growth fell marginally due to weak manufacturing investment, the number remains supportive.
Clearly efforts by China’s central regulatory agencies and local governments to tighten policy are working. We view the current slowdown as managed decelerations to combat worries in shadow banking, real estate and local debt financing rather than the start of a broader fall in economic condition. China’s Premier Li has continued to state that China will further put into place conservative monetary policy to lower financial risk as the highest priority. Interestingly, this is counter to what we are hearing from the US, where the Trump administration is attempting to hyper-accelerate the US economy with pro-growth policy (despite solid growth and full employment).
We remain optimistic on the China story and see key opportunities in Asian assets. On the FX side we are constructive on EM Asia against JPY as lower interest rates, higher growth, less protectionism risk and general positive risk-taking environments will support the currencies. USDJPY might have peaked failing to break 114.38 on three occasions; suggesting marginal downside corrections; however, JPY has further weakness against regional peers (THB, INR, IDR and KRW).