• The January increase was stronger than the 0.1% gain expected going into the report and followed an upwardly revised 1.0% increase in December (originally reported as up 0.6%).
• Eliminating a number of volatile components such motor vehicles and gasoline stations, so-called control retail sales were up an expected 0.4% though this followed an upwardly revised 0.4% gain in December (0.2% previously).

The overall monthly increase was stronger than expected with a greater lift emanating from a number of components. The report was expected to be restrained by indications of falling unit auto sales though the 1.4% drop in sales at motor vehicle dealerships was slightly less than the 2% we had expected going into the report. The level of January auto sales still remains at near cyclical peaks. Higher gasoline prices were expected to send nominal gasoline station receipts up 2.0% in the month though today's report showed a slightly greater 2.3% rise. Overall retail sales was also helped by a strong 1.4% jump in sales at food services and drinking places. This increase more than offset the 1.1% decline recorded in December.

Excluding these three volatile components, along with a 0.3% rise in sales at building material stores, so-called control sales rose a solid, though expected, 0.4% in the month. The January gain matched an upwardly revised 0.4% increase in December that was previously estimated as up 0.2%. January saw impressive gains in clothing (1.0%) and furniture stores (0.8%) sales. A main offset was flat activity at 'non-store retailers,' which includes mainly internet retailers, though this followed a solid 1.9% jump in the final month of the Christmas holiday shopping period.

Our Take:

The strong overall increase was helped by rising gasoline prices that implied a more modest gain on a volumes basis. However, indications this built further onto even great strength in December implies still solid momentum in consumer spending benefitting from solid job gains and low financing costs. This is expected to be reflected in a 2.4% Q1 real consumer spending gain that would in line with the 2.5% increase recorded in Q4. This strength will keep overall GDP growth rising at an above-potential pace. This pace of growth over the second half of last year returned the central bank to tightening mode in December. Expectations of solid growth continuing are projected to result in the Fed continuing to tighten gradually through 2017. Our forecast assumes that the current fed funds range of 0.50% to 0.75% will finish 2017 at 1.00% to 1.25%.

Retail sales rose by 0.4% in January, beating market expectations for a 0.1% gain. The rise follows last month's upwardly revised 1.0% print (previously 0.6%).

Excluding autos (0.8%) and gasoline (0.2%), sales were even stronger (0.7%). The control group, which also removes building materials and food services and is used in the calculation of GDP, recorded an impressive 0.4% gain on the month following an upwardly revised 0.4% print in December.

Gains were seen pretty much across the board, with the biggest gains coming from the sporting goods (1.8%), electronics (1.6%), and food services (1.4%) categories. Sales at motor vehicles and parts dealers (-1.4%) was the only major category to drag the headline print lower. Nonetheless, weakness in this number was expected given the very strong print (3.2%) in the prior month and corroborates the decline seen in unit sales reported earlier this month.

Key Implications

American consumers finally appear to be opening up their wallets. The robust retail sales gain experienced during January comes on top of an upwardly revised print in the prior month and suggests that Americans are not taking much of a break following what was a very busy holiday shopping season. Spending was strong and with the gains broad across almost all components of the retail sector.

Particularly encouraging is the fact that strong spending is being seen in the discretionary spending categories This suggests that the gains in consumer confidence since the election are finally materializing as American consumers take to the malls to indulge in retail therapy and enjoy meals out at the same time. The more seasonal temperatures in January also allowed Americans to hit the slopes with new skis, snowboards, and winter jackets. The 1.8% monthly gain recorded in the sporting goods category follows three consecutive monthly declines, while the clothing component recorded the strongest gain all season.

The outlook for 2017 looks bright. A strong handoff from the fourth quarter bodes well for the first quarter consumer spending component of GDP, which should come in around 2.8%. Furthermore, continued strength in job and income gains and still relatively low lending rates will continue to encourage spend in the coming months, with the consumer likely to be a key support for economic growth this year.

Inflation rose to 2.5% y/y in January, marking the fastest pace in the headline index since March 2012. This was somewhat stronger than the consensus estimate of 2.4%. On a seasonally adjusted basis, prices rose 0.6% on the month from the previous month - twice the rate of monthly rate of advance projected by consensus (+0.3% m/m). Consumers paid more for gasoline, shelter, apparel, and new vehicles in January.

The price of gasoline was responsible for about half of the 0.6% m/m advance in January, rising 7.8% m/m, reflecting the pass-through from higher price for crude oil. Energy has returned to provide a significant boost to headline inflation, with prices for energy commodities up over 20% from year ago levels, and natural gas up about 10% during that time.

Food prices fell for the fifth consecutive month on a year-on-year basis, driven down in January by a 4.9% y/y decline in the price of fruits and vegetables.

Stripping away volatile food and energy prices, core CPI rose 2.3% y/y in January, with the index rising 0.3% on the month, driven higher by firm price growth in shelter, medical services, transportation, and apparel costs. Moreover, used vehicle prices declined -3.7% y/y in January, likely a reflection of a large stock of used vehicles that dealers have been unable to unload. On the other hand, prices for new vehicles rose +1.0% y/y in January.

Key Implications

Headline inflation in January was well above 2% for the second consecutive month, owing largely to a much anticipated bump from the rising energy prices. Moreover, we anticipate that higher energy prices will remain a key driver behind the rise of headline inflation this year, which could see it top out just below 3% y/y by the third quarter.

No matter which measure of underlying inflation you look at, price growth is firming. Core inflation (ex food and energy) rose 2.3% y/y, just above its average pace in the previous twelve months. The FOMC's preferred inflation gauge, the core PCE deflator has been more subdued, holding near 1.7% y/y over the previous five months, and about 0.1 percentage point firmer than price growth in early 2016. However, given the uptick in the core CPI, the core PCE measure for January could also firm.

Overall, the price data will likely be interpreted in two different ways by the FOMC. On the one hand, higher headline inflation will generally be deemed as transitory, as the base-year effects from the rise in energy prices from the lows of early 2016 dissipate. We anticipate that once this factor falls out of the base year, headline inflation will return to a more subdued range as the past appreciation of the U.S. dollar works to temper price growth of largely imported consumer goods. On the other hand, the continued improvement in underlying inflation, driven in part by firming wage growth, will be interpreted by the Fed as a sign of a decreasing economic slack, and therefore confirm the need for a tightening of monetary policy. We expect the Fed will move by 25 basis points in June, and then again before the end of this year in order to prevent a persistent overshoot of its 2% target.

The first batch of releases in our US economic data marathon today painted a fairly optimistic picture for the US, with CPI inflation rising 2.5% from January last year, core inflation rising 2.3% over the same period and retail sales up 0.4% from what was already and strong December, made even better by the upward revision to 1%. Under the circumstances, it's no surprise that the US dollar has rallied on the back of these numbers as all exceeded expectations and should feed into the narrative that the economy is improving and the Fed should continue raising rates.

However, the lesser followed release, real average weekly earnings, was not so impressive falling 0.4% and continuing a potentially worrying trend that has materialised over the last year.

The full US real earnings report from the BLS can be found here.

We've all been relieved that average hourly earnings have, broadly speaking, been improving, but with inflation now ticking higher and the average workweek having fallen over the last year, consumers may not be as well off as we hoped.

Daily Pivots: (S1) 113.50; (P) 114.00; (R1) 114.74; More...

USD/JPY's rise from 111.58 extends to as high as 114.94 so far today. Intraday bias remains on the upside for 115.36 resistance. We're holding on to the view that correction from 118.65 has completed at 111.58. Break of 115.36 will confirm this bullish case and bring retest of 118.65 high. Meanwhile, below 112.85 minor support will dampen this bullish view and could extend the correction from 118.65. In that case, downside should be contained by 38.2% retracement of 98.97 to 118.65 at 111.13 and bring rebound.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box

Daily Pivots: (S1) 1.0033; (P) 1.0059; (R1) 1.0086; More.....

USD/CHF's rise from 0.9860 extends today and reaches as high as 1.0118 so far. Intraday bias remains on the upside for a test on 1.0342 resistance next. We'd be cautious on topping below there. On the downside, below 1.0030 minor support will turn bias neutral first. But new term outlook will now stay cautiously bullish as long as 0.9860 support holds.

In the bigger picture, prior rejection from 1.0327 resistance argues that USD/CHF is staying in a medium term sideway pattern. In any case, decisive break of 1.0342 resistance is needed to confirm underlying strength. Otherwise, we'll stay neutral in the pair first. In case of another fall, we'd expect strong support from 0.9443/9548 support zone. Meanwhile firm break of 1.0342 will target 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box

Daily Pivots: (S1) 1.2422; (P) 1.2485; (R1) 1.2528; More...

GBP/USD drops notably today but stays in range above 1.2346 minor support. Intraday bias remains neutral first. Price actions from 1.1946 are viewed as a consolidation pattern, with rise from 1.1986 as the third leg. In case of another rise, we'd expect upside to be limited by 1.2774 to bring larger down trend resumption. On the downside, below 1.2346 will revive the case that such consolidation is completed at 1.2705 already. In that case, intraday bias will turn back to the downside for retesting 1.1946 low.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box

Daily Pivots: (S1) 1.0548; (P) 1.0590 (R1) 1.0621; More.....

EUR/USD dives to as low as 1.0520 so far today and intraday bias remains on the downside. As corrective rise from 1.0339 is finished at 1.0828 already, fall from there is tentatively viewed as resuming larger down trend. Deeper fall should now be seen back to retest 1.0339. Decisive break there will confirm our bearish view and target parity. On the upside, above 1.0632 will turn bias neutral first. But recovery should be limited well below 1.0828 and bring another decline.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box

Dollar rides on a bunch of strong economic data and surges broadly. CPI rose 0.6% mom, 2.5% yoy in January, above consensus of 0.3% mom, 2.3% yoy. The headline annual consumer inflation rate was the highest since March 2012. Meanwhile, headline retail sales rose 0.4% in January versus expectation of 0.1%. Ex-auto sales rose 0.8% versus expectation of 0.4%. Empire state manufacturing index also jumped to 18.7, up from 6.5 and beat expectation of 7. The dollar index jumps to as high as 101.76 so far. The development affirms the case for the index to retest January high at 103.82. The greenback has now turned into the strongest major currency for the week while Japanese yen remains the weakest.

Dollar boosted by Fed Yellen

Dollar's rally this week was triggered by hawkish comments from Fed chair Janet Yellen yesterday, at the testimony before the Senate Banking Committee. Yellen will have the second day of testimony before the House today. While reiterating that all meetings are 'live' for a rate hike, Yellen warned that waiting too long to remove accommodation would be unwise'. Meanwhile, she cautioned over the uncertainty over the economic policy under Donald Trump's administration. Yellen emphasized the Fed's monetary policy stance is not based on 'speculations' about fiscal policy. The economy's 'solid progress' is what is 'driving the policy decisions'. More in Yellen Raised Hopes Of March Rate Hike.

Sterling lower on weak wage growth

UK claimant counts dropped sharply by -42.4k in January, much better than expectation of 1k rise. Claimant count rate dropped to 2.1%. ILO unemployment rate was unchanged at 4.8% in December as expected. However, average weekly earnings slowed to 2.6% 3moy versus expectation of 2.8% 3moy. The weak wage growth agreed to BoE's cautious stance on monetary policies. There were some speculations that BoE could raise interest rate by the end of the weak. But the CPI miss earlier this week and today's weak wage growth data should have done much to damp such speculations. Sterling is trading as the weakest major currency today and mixed for the week.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0548; (P) 1.0590 (R1) 1.0621; More.....

EUR/USD dives to as low as 1.0520 so far today and intraday bias remains on the downside. As corrective rise from 1.0339 is finished at 1.0828 already, fall from there is tentatively viewed as resuming larger down trend. Deeper fall should now be seen back to retest 1.0339. Decisive break there will confirm our bearish view and target parity. On the upside, above 1.0632 will turn bias neutral first. But recovery should be limited well below 1.0828 and bring another decline.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

Economic Indicators Update

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box

USD/CAD has ticked upwards in the Wednesday session. Currently, the pair is trading slightly below the 1.31 level. On the release front, Canadian Manufacturing Sales is expected to post a strong gain of 1.4 percent. In the US, it's a busy day. We'll get a look at release retail sales and CPI reports, and Janet Yellen will continue her testimony about the semiannual Monetary Policy Report before Congress. On Thursday, the US releases three key events – Building Permits, Philly Fed Manufacturing Index and unemployment claims.

All eyes are on Fed Chair Janet Yellen this week. The Fed chair testified before a Senate committee on Tuesday, and was surprisingly upfront about monetary policy, stating that she expected that the Fed would raise rates in the near future. Yellen stated that "waiting too long to remove accommodation would be unwise", referring to the re-hot labor market and expectations that inflation would reach the Fed's target of 2 percent. Will the Fed opt to raise rates in March or in June? The markets will be looking for clues on the timing of a move, as Yellen continues her testimony on Thursday before the House Financial Services Committee.

Canadian Prime Minister Justin Trudeau met with President Trump in Washington on Monday. It was "mission accomplished" for the Canadian leader, who was looking for reassurances from Trump that he would not tear up NAFTA, the trade agreement which is the bedrock of the trade relationship between the two countries. After the leaders met, Trump said his biggest concern with NAFTA was with Mexico rather than its northern neighbor. Trump stated that the US has a "very outstanding trade relationship with Canada. We'll be tweaking it." Trudeau could do without the tweaking, but Trump's comments nonetheless come as an enormous relief to the Canadian leader. Given that 80 percent of Canadian exports go to the US, any significant protectionist measures from the US could have drastic negative implications for the Canadian economy.