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Atlanta Fed President Raphael Bostic noted there has been "substantial and gratifying progress" in reducing inflation's pace, but he warns against premature celebrations.

While inflation is expected to continue to decline, it would be "more slowly than the pace implied by where the markets signal monetary policy should be," Bostic said in a speech overnight.

With a "strong labor market and macroeconomy," Bostic highlighted the opportunity to deliberate policy shifts "without oppressive urgency".

In an interview, ECB Governing Council member Edward Scicluna pointed to March economic projections as a crucial factor that could justify a shift in policy, opening the door for rate cuts. "March could be it," he suggested, "We'll see how many think that there's no need to wait for June."

Acknowledging the "bumpy" path toward achieving ECB's disinflation objectives, Scicluna emphasized the clear trend of declining inflation. "You should see the writing on the wall and admit objectively that the trend is going down," he stated.

Despite the possibility of justifying a hold on rate cuts due to various concerns, including geopolitical tensions, Scicluna argued for a more direct approach: "You have to make a judgment; you don't find these excuses."

"Let's face reality — of course, risks are flying all around us," he said. "But when you get a comprehensive look at things, prices are falling."

"At a time when demand is falling, I believe you can let off the pedal a bit," Scicluna said.

BoE MPC Catherine Mann commented overnight on the -0.3% quarterly contraction in GDP for Q4 2023. She characterized this period as a "soft patch," adding that the downturn was anticipated and aligned with her expectations.

Rather than dwelling on past performance, Mann is directing her attention to forward-looking indicators, such as business surveys and PMIs, along with BoE's Decision Maker Panel. "Those are all looking good," she said.

However, Mann voiced ongoing concerns regarding the persistence of services price inflation in the UK, which she believes is more tenacious than in other advanced economies.

She added that decline in goods price inflation alone would not suffice to sustainably anchor consumer price inflation to the Bank's 2% target.

• USDCAD reversed from resistance level 1.3530
• Likely to fall to support level 1.3400

USDCAD currency pair recently reversed down from the key resistance level 1.3530 (which has been reversing the price from the middle of January), intersecting with the upper daily Bollinger Band and the 50% Fibonacci correction of the downward ABC correction (2) from the start of November.

The downward reversal from the resistance level 1.3530 stopped the previous impulse waves 3 and (3).

Given the strength of the resistance level 1.3530, USDCAD currency pair can be expected to fall further to the next support level 1.3400.

• S&P 500 reversed from support level 4930.00
• Likely to rise to resistance level 5050.00

S&P 500 index recently reversed up from the support level 4930.00 (former support from the end of January), intersecting with the 20-day moving average and the support trendline of the daily up channel from November.

The upward reversal from the support level 1.3530 stopped the previous minor correction (ii).

Given the clear daily uptrend, S&P 500 index can be expected to rise further to the next resistance level 5050.00.

Markets

The slew of eco data from the US came in mixed. February regional sentiment indicators including the Empire Manufacturing index and the Philly Fed business outlook were better than expected. Details showed improvement across almost all subseries, including 6-month forward looking gauges. We note the price gauges re-emerging. Weekly jobless claims also joined the consensus-beating side with 212k vs 220k. But US headline retail sales fell 0.8% m/m, more than the -0.2% expected. 9 out of the 13 categories posted decreases, led by building material stores and auto dealers. All core gauges fell short of the +0.2% consensus as well, with the control group (used for private consumption GDP calculations) dropping by 0.4% m/m. While the numbers may have been impacted by harsh winter weather, they dominated the market reaction. Yields were down about 1.5 bps prior to the release. Current changes vary between 4.3 (30-y) and 5.8 (5-y) bps but trade off intraday lows. German yields shrugged off the additional declines caused by US spillovers, limiting daily losses to <2 bps. Appearing before the European Parliament today, ECB’s Lagarde warned against hasty action. She suggested that it could put inflation back on the rise and force the ECB into the brakes again. Lagarde highlighted salaries as “an increasingly important driver of inflation dynamics in the coming quarters.”, adding that services inflation has shown signs of persistence. Her comments came hours before the Commission released updated economic forecasts. It slashed its 2024 GDP growth prognosis from 0.8% to just 0.5% as the economy entered the year on a weaker footing than expected. The forecast for next year was marginally revised down to 1.5%. Inflation is seen easing to 2.7% in 2024 and 2.2% in 2025.

A weaker dollar is the name of the game on FX markets. DXY slips to 104.35. Including yesterday’s move, about two-thirds of Tuesday’s CPI gain is wiped out. EUR/USD extended earlier gains after the releases to change hands in the 1.078 region (1.072 at the open). Sterling joined the Anglo-Saxon trend lower after this morning’s weaker-than-expected Q4 GDP numbers (including weak details). A two-day rally lifts EUR/GBP from the recent lows around 0.85 towards 0.856 currently. UK money markets added to rate cutting bets, even as BoE policymaker Greene said she wanted to see more evidence that inflation is less embedded than previously feared before considering to loosen policy. Greene at the latest meeting called for a stable policy rate after pushing for hikes in the ones before.

News & Views

Czech inflation rose less than expected in January, by 1.5% M/M (vs 2% consensus). The usual repricing at the start of the year was thus less stronger than feared. Annual inflation fell from 6.9 Y/Y to 2.3% Y/Y, significantly beating analyst estimates (2.9%) and the Czech National Bank’s assumption (3%). The fade-out of the statistical effect of the energy savings tariff contributed to the sharp slowdown in annual inflation. Administered prices (6% Y/Y instead of 8.4% Y/Y expected by CNB), core inflation (2.9% Y/Y vs 3.8% Y/Y) and monetary policy-relevant inflation (2.2% Y/Y vs 3% Y/Y) all improved much more than hoped for. It prompted an exceptional statement by CNB governor Michl, lauding CNB staff for restoring price stability. He calls it a partial success though as the CNB needs to stay hawkish. The weakening koruna and public finance deficit are upside risks to inflation, arguing for lowering interest rates cautiously and for being able to halt the rate reduction process at any time. Michl also warns that rates will be higher than what has been the case over the last ten years or more as the CNB discusses the option of a need for higher (neutral) rates. The Czech koruna immediately lost ground after the CPI print with EUR/CZK touching 25.50 for the first time since March 2022. The pair reversed course after the Michl statement (CZK-reference unlike after last week’s CNB meeting) towards 25.40. CZK swap yields lose 8 to 15 bps across the curve, the front end outperforming.

Polish inflation accelerated less than feared as well, but the deviation from consensus was much smaller than in the Czech Republic. CPI rose by 0.4% M/M in January (vs 0.5% forecast) with Y/Y-inflation falling from 6.2% to 3.9% (vs 4.1%). Details showed amongst others dwelling prices rising by 0.8% M/M and only transport (-2.8% M/M) and fuel prices (-2.3% M/M) contributing negatively. Polish swap rates lose over 7 bps across the curve, but the biggest part of the move already occurred ahead of the CPI release. Comments by NBP Kotecki might be at play. Unlike NBP governor Glapinski, he thinks that there will be room for a slight Polish rate cut in H2 2024. The Polish zloty stands its ground at EUR/PLN 4.34.

Retail sales declined by -0.8% month-on-month (m/m) in January, in contrast to December's downwardly revised 0.4 % gain (previously 0.6%). This was lower than the consensus forecast calling for a more modest decline of -0.2%.

Trade in the auto sector was down -1.7% m/m, reflecting a decrease in sales at both motor vehicle dealers (-1.8%) and automotive parts and accessory stores (-0.6%).

Sales at gasoline stations continued to pull back for the fourth consecutive month, falling by -1.7% m/m. This largely reflected a further reduction in gas prices. The building materials and equipment category declined by a notable -4.1% m/m.

Sales in the retail sales "control group", which excludes the above volatile components (autos, building materials and gas) and is used to estimate personal consumption expenditures (PCE) fell by -0.4% m/m. This is its first decline since March of last year and December's figure was also revised down to 0.6% growth from the previously reported 0.8%.

• Among the control group, positive contributions came from sales at furniture and electronics stores (0.7% m/m) and food and beverage stores (0.1% m/m). Sales at department stores were flat on the month.
• All the remaining categories registered declines. Miscellaneous store retailers registered the largest decline of -3.0% m/m.

Food services & drinking places – the only services category in the retail sales report – rose by 0.7% m/m.

Key Implications

After a noteworthy spending performance to close out last year, consumers took a breather in January, with retail sales pulling back by a sizeable amount to start the new year. However, inclement weather across much of the U.S. may have had some impact on spending through January, which suggests we could see some bounce back over the coming months. After incorporating this morning's data, consumer spending is tracking 2.5% q/q (annualized) for the first quarter.

Given the stalling out of progress on the inflation front in January, Fed policymakers are likely reassured to see some slowing in retail spending. While much of the inflation uptick is stemming from services, a pullback on the goods side of the economy has helped to contain overall price pressures. As such, a deceleration, if not outright continued decline, in retail spending will help policymakers determine when to cut interest rates – which is seeming more likely to occur in H2.

Daily Pivots: (S1) 1.0704; (P) 1.0719; (R1) 1.0744; More...

Intraday bias in EUR/USD stays neutral as consolidation continues above 1.0694. Outlook will remain bearish as long as 1.0804 resistance holds. Below 1.0694 will resume the fall from 1.1138 to retest 1.0447 support. Nevertheless, considering bullish convergence condition in 4H MACD, above 1.0804 will turn bias to the upside for stronger rebound.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is seen as the second leg. While further rally could cannot be ruled out, upside should be limited by 1.1274 to bring the third leg of the pattern. Meanwhile, sustained break of 1.0722 support will argue that the third leg has already started for 1.0447 and possibly below.

Daily Pivots: (S1) 1.2531; (P) 1.2571; (R1) 1.2606; More...

Outlook in GBP/USD is unchanged and intraday bias stays neutral at this point. On the upside, break of 1.2691 resistance will indicate that correction from 1.2826 has completed. Intraday bias will be back on the upside for retesting 1.2826. Nevertheless, decisive break of 1.2499 will argue that whole rise from 1.2036 has completed and turn near term outlook bearish.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to up trend from 1.0351 (2022 low). Rise from 1.2036 is seen as the second leg, which could be still in progress. But upside should be limited by 1.3141 to bring the third leg of the pattern. Meanwhile, break of 1.2499 support will argue that the third leg has already started for 38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075 again.