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Monday, May 15, 2017

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Tuesday, May 16, 2017

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Wednesday, May 17, 2017

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Thursday, May 18, 2017

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Friday, May 19, 2017

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U.S. Review

Mixed Signals on Inflation to Start Q2

• Survey data from businesses suggest that the labor market continues to tighten.
• Import and producer prices showed signs of acceleration this week, but another soft reading for the core CPI sends mixed signals to the Fed. On balance, the Fed remains positioned to hike rates in June while maintaining its slow and steady mentality.
• Retail sales were disappointing in April, but upward revisions to March's initial reading may indicate personal consumption growth was likely a bit stronger in Q1 than initially reported.

Mixed Signals on Inflation to Start Q2

The National Federation of Independent Business (NFIB) Small Business Optimism Index kicked off the week with a small decline of 0.2 points in April. The decline was led by a drop in expectations for improvement in the economy, which fell 8 points following the initial unsuccessful attempt to replace the Affordable Care Act. Despite the dip, confidence remains high, and the employment segments of the survey signaled even more pronounced labor market tightening. The share of respondents saying that it is hard to fill job openings edged up to 33 percent in April, the highest level since November 2000 (top chart). The share of business owners citing "finding qualified labor" as their most important problem is also trending near its previous high.

The Job Openings and Labor Turnover Survey (JOLTS) showed job openings rose slightly in March, ending the month at 5.7 million. With a relatively high share of employers struggling to fill positions, involuntary separations remain limited; the layoff & discharge rate is near an all-time low. The quit rate held steady at 2.1 percent in March, the level at which this measure has hovered for most of the past year. Although this marks an improvement from earlier in the cycle, wages have still failed to accelerate thus far in 2017. With the share of small businesses reporting jobs are hard to fill at a 17-year high, an acceleration in quits would bode well for a pick-up in wage growth later this year.

Inflation showed some continued signs of firming this week. Led by higher industrial supplies and fuel costs, import prices increased 0.5 percent in April. Excluding fuel, import prices increased 0.3 percent and are up 1.1 percent over the past year. Over the past three months, nonfuel import prices have risen at a 3.5 percent annualized clip, the fastest pace since 2011 (middle chart). Producer prices also surprised to the upside, rising 0.5 percent in April compared to expectations for a 0.2 percent increase. Excluding food, energy and trade services–our preferred measure of the PPI–prices jumped 0.7 percent, the largest increase in the three and a half year history of the series.

Consumer prices also rose in April, boosted by higher energy prices. However, the core CPI rose a smaller-than-expected 0.1 percent, bringing the year-ago pace of core inflation down to 1.9 percent. Core consumer price inflation has eased a bit to start 2017; the 1.9 percent year-ago reading was the first sub-two percent print since late 2015. The slowdown in core consumer prices is a bit puzzling given the price pressures further back in the pipeline. With lower energy prices likely to weigh on headline inflation in May, the Fed will have reason to maintain its slow and steady approach to tightening policy at its June meeting.

Retail sales rounded out the week this morning. Sales were disappointing in April, but upward revisions to March's initial reading suggest personal consumption growth may have been a bit stronger in Q1 than initially reported. The series is adjusted for the timing of Easter, however, and we may see a different story in the personal consumption data. Building materials, motor vehicles & parts and electronics outperformed, while clothing, furniture and food & beverage sales were soft.

U.S. Outlook

Housing Starts • Tuesday

Unseasonably mild winter weather during the first two months of the year helped get homebuilding off to a strong start in 2017. The relatively favorable building conditions allowed more construction activity to begin earlier this year, with housing starts through the first three months of the year up 8.1 percent from a year ago. Apartment construction accounted for a significant portion of the increase, as starts of five units or more are up 14.1 percent on a year-to-date basis. Single-family housing starts are up a more modest 5.9 percent over the same period.

We look for housing starts to recoup most of March's decline and rise to a 1.257 million-unit annual rate in April. While the mild winter weather likely pulled some building activity forward into the first quarter, we continue to expect housing starts to rise 7.3 percent this year, with virtually all of the growth coming from single-family construction.

Previous: 1,215K Wells Fargo: 1,257K Consensus: 1,260K

Industrial Production • Tuesday

Industrial production rose 0.5 percent in March, marking the second-largest increase in more than a year. However, the gain was almost entirely driven by a surge in utilities output, which reflected the return of more normal temperatures in March. Looking past the headline, manufacturing production declined 0.4 percent on the month, snapping a six-month string of gains. Notably, motor vehicle & parts output declined 3.0 percent as auto production pulled back. The weakness was not solely in autos, as declines were recorded across most durable and nondurable subsectors.

While the ISM manufacturing index edged another leg down April, the index remains at a still solid level that is consistent with our forecast. Looking to April, we expect a modest pickup in industrial production. While a breakout in activity seems unlikely in the nearterm, we expect manufacturing output expanded somewhat in April, and we look for a gain of 0.4 percent.

Previous: 0.5% Wells Fargo: 0.4% Consensus: 0.4%

Leading Economic Index • Thursday

The Leading Economic Index (LEI) continued to trend higher in March, increasing 0.4 percent. The gain marks the index's seventh-consecutive monthly increase. The improvement was relatively broad based as six of the LEI's eight components added to growth over the month. The interest rate spread component was the largest contributor in March, adding 0.19 percentage points to the headline. ISM new orders and the housing permits components were also strong on the month. Meanwhile, manufacturing hours worked and initial jobless claims were sources of weakness, subtracting 0.13 percentage points and 0.09 percentage points from the topline figure.

We expect the LEI to rise a modest 0.4 percent in April. The yield spread, manufacturing average weekly hours and initial unemployment claims components likely provided the largest contributions to the index's gain.

Previous: 0.4% Wells Fargo: 0.4% Consensus: 0.3%

Global Review

French Elections, Canadian Housing, and More

• By early this week financial markets were breathing a big sigh of relief with the results from the French elections, which produced a lopsided victory for the establishment (for lack of a better term) candidate, Emmanuel Macron, versus the extreme right candidate, Marine Le Pen.
• Canadian housing starts came down as expected to a still relatively strong 214,100 unit pace from a slightly downwardly revised 252,300 unit pace in March. March's increase in housing starts was the strongest print since early in 2012.
• Mexican industrial production remained flat in March.

Liberty, Equality, Fraternity

By early this week financial markets were breathing a big sigh of relief with the results from the French elections, which produced a lopsided victory for the establishment (for lack of a better term) candidate, Emmanuel Macron, versus the far right candidate, Marine Le Pen. Although polls before the election showed an almost uncontested election with Mr. Macron wining the contest almost unchallenged, many were concerned with the ability of polls to measure correctly, especially after several "surprises" during the last several years, i.e., Brexit and Trump.

Now, Mr. Macron will have to come up with a sound strategy to gain enough members in parliament during the June parliamentary elections as well as design a strategy to bring other parties to the table so he can form a governing coalition that can start delivering on his promises. And this is not going to be easy. Ms. Le Pen's rallying banners are not something that you can dismiss and if the political system tries to do so they do it at their own perils. Although Ms. Le Pen lost the election, the gain in votes was very important. In fact, voter participation during this presidential election was one of the lowest since the 1981. Interestingly enough, Ms. Le Pen almost doubled the number of voters compared to her father's, 10.6 million compared to 5.5 million in 2002, while Mr. Macron had only 20.7 million people voting for him versus 25.5 million who voted for Jacques Chirac in 2002 (read more on France's challenges on our Topic of the Week section).

Canadian Housing Starts Payback in April

In Canada, the country's housing market which has remained relatively strong, even as the economy downshifted due to the decline in oil prices over the last several years, saw some payback in April from the strong increase recorded in March. Housing starts came down as expected to a still relatively strong 214,100 unit pace from a slightly downwardly revised 252,300 unit pace in March. March's increase in housing starts was the strongest print since early in 2012. Housing starts in Canada are normally volatile but it seems that volatility has increased considerably since 2015 (middle graph). Meanwhile, building permits were down further in March, this time 5.8 percent compared to a decline of 2.8 percent in February while the new housing price index was up 0.2 percent after increasing 0.4 percent in February. This follows a downgrade on Canadian banks by Moody's investor services due to high household debt and concerns on high home prices.

Mexican Industrial Production Remains Flat in March

In Mexico, industrial production remained flat in March. Public utilities were up 0.5 while the mining sector improved 0.1 percent. However, manufacturing output was down 0.3 percent and construction output was down 0.2 percent. The year-over-year non-seasonally adjusted numbers looked much better, but those are not a good measure this time around because Easter occurred in March during 2016 and in April this year, which distorts the index and shows a stronger industrial sector than what it truly is.

Global Outlook

U.K. CPI • Tuesday

The U.K. will release CPI inflation for April this coming Tuesday. The consensus forecast looks for it to rise 0.4 percent on the month and 2.6 percent year over year. The CPI inflation rate in the U.K. stands at 2.3 percent and has trended upwards since early 2016. The sharp depreciation of the British pound following the Brexit referendum last June has seemed to have inflation implications.

While the rebound in energy prices has certainly helped support price pressures, core CPI, which strips out energy effects, has picked up too. April's core rate is expected to grow 2.2 percent in April, following 1.8 percent growth in March. The jump in prices has eroded growth in real income, which has, in turn, weighed on consumer spending. However, stagnation in average hourly earnings growth suggests that the core rate of inflation likely will not continue to shoot up.

Previous: 2.3% (Year-over-Year) Wells Fargo: 2.8% Consensus: 2.6%

Japan Q1 GDP • Wednesday

Japanese economic growth in Q1 is slated for release on Wednesday of next week. GDP is expected to expand 0.4 percent on a sequential rate and 1.8 percent at an annualized rate. This would be an improvement from the 0.3 percent quarter-over-quarter rate and 1.2 percent annualized rate in Q4 2016. Economic growth appears to be strengthening to begin 2017 as a result of a relatively weak yen and strong global demand, which help the Japan's vital export sector. Exports in March rose 12.0 percent, the fasted pace in over two years, coming at the heels of 11.3 percent growth in February.

Japan's Tankan index for large manufacturers in Q1 jumped to its highest level since Q4 2015. Moreover, the Bank of Japan's accommodative monetary policy seems to be supporting economic activity. We expect the Japanese economy to expand 1.2 percent in 2017, in-line with the consensus expectation.

Previous: 1.2% (Annualized) Wells Fargo: 2.3% Consensus: 1.8%

Canada CPI • Friday

Canadian CPI inflation for April is set to be released next Friday. Inflation cooled to 1.6 percent in March from 2.0 percent in February, year over year. March's rate landed below the midpoint of the Bank of Canada's (BoC) target range of 1 percent to 3 percent. On a sequential basis, prices actually declined 0.2 percent in March from a month earlier – a slight moderation from February's 0.3 percent slide. Canada's economy has been gaining momentum to begin 2017, helped by a rebounding energy sector that is enjoying higher oil prices. This, in turn, should put upward pressure on prices. We expect CPI inflation to average 2.3 percent in 2017 and 1.9 percent in 2018.

The BoC held its target rate for the overnight rate steady at 0.5 percent, expressing guarded optimism in its statement. In its April monetary report, the BoC revised its inflation expectations upward to 1.9 percent in 2017 and 2.0 percent in 2018.

Previous: 1.6% (Year-over-Year) Wells Fargo: 1.3% Consensus: 1.8%

Point of View

Interest Rate Watch

Elections and Market Economics.

Elections impact market expectations and certainly have altered prices thereby creating a political premium to markets independent of economic fundamentals. The challenge for investors is that political actions do alter market prices independent of any economic actions such that the fundamental values are obscured—at least for a short time.

Over the last year there have been interesting moves in the benchmark bond rates (top graph) and the euro/dollar spot rate (middle graph) that reflect expectations and the interaction of financial markets on a global scale.

Benchmark Bonds: A Political Barometer

In the top graph, the pattern of ten-year yields corroborates the politics/market pricing interaction. With the election of Donald Trump, the ten-year US-German and US-French spread widened out as expectations for economic policy actions and thereby more rapid economic growth took center stage. However, since the inauguration yield differences have declined as the realization that policy initiatives will take time and are likely to be moderated in scale as the legislative process moves forward. Tax cuts and fiscal stimulus through infrastructure spending will take time. Reflect on the observations that President Reagan's tax program did not pass Congress until August of his first year. The anticipation of the FOMC's increase in the funds rate in March provided a short-term boost to the benchmark rate but did not alter the broader downtrend to a level just above the pre-election level.

Euro/Dollar Spot and Economic Expectations: Caught in the Political Vortex

As illustrated in the middle graph, the euro/dollar exchange rate also exhibited a sharp reaction, in the short run, to the election and anticipation of economic change. Moreover, like benchmark yields, the exchange rate has drifted back toward pre-election levels. Finally, the U.S. PMI index has moved up and now back down as policy expectations have adjusted.

Credit Market Insights

Positive Attitudes Toward Housing

Earlier this week, the Federal Reserve Bank of New York released the results of its 2017 SCE Housing Survey which sheds light on consumers' expectations, behaviors and experiences related to home buying. The survey showed that more home buyers are expecting home prices to increase on a oneand five-year outlook. Moreover, a growing share of households still views owning a home as a sound financial investment.

That said, consumers' expectations for an increase in future mortgage rates have also increased, rising to 5.6 percent from 5.2 percent in 2016. Furthermore, sixty-five percent of renters still view obtaining a mortgage as difficult, but thought credit access was becoming easier. That said, tightening credit standards and rising mortgage rates (though still low) could make it more difficult and expensive for some to purchase a home.

What is encouraging is that renters are optimistic about their home buying prospects with 55.2 percent of those surveyed indicating that they will own a home at some point in the future. In fact, first quarter data for household formations showed the share homeowners rising to its highest level since Q3-2006, signaling that an increasing number of households are choosing home owning over renting.

With attitudes toward home buying remaining positive and more renters looking to own, we expect housing starts to reach 1.26 million units in 2017 and 1.35 million in 2018.

Topic of the Week

Emmanuel in Élysée

On May 7th the people of France elected 39 year old Emmanuel Macron as the leader of France, decisively defeating far-right leader Marine Le Pen (top chart). Having never held elected office, questions have risen over whether he can live up to his lofty campaign promises, which include significant economic reform. In his acceptance speech, Macron acknowledged the divisions and doubts disturbing France, but made a pledge to defend all peoples of France and Europe, making note of the common destiny of the European continent. Macron's staunchly pro-Europe stance stands in direct contrast to the rhetoric of his opponent.

Macron's pro-market agenda includes cutting regulation and improving education to boost competitiveness. Macron wants to cut 120,000 public sector jobs and take further measures to stabilize public finances. Moreover, reducing the unemployment rate to seven percent, from its current 10.1 percent level, is an objective of his administration. Other potential reforms include reducing the corporate tax rate to 25 percent from its current 33.3 percent rate. A 50-billion-euro investment program targeting specific industries such as renewable energy and transportation was also floated on the campaign trail. However, his reformist agenda could be undermined if he is unable to secure a favorable result in the parliamentary elections in June. Picking up seats in these elections should aid his legislative goals.

Macron is inheriting a French economy that is failing to gain traction and one that does not seem likely to break out any time soon. French GDP expanded just 1.2 percent in 2016 and has averaged just 0.8 percent on an annual rate over the past 5 years. Recently released GDP data for Q1 suggest the economy also started off 2017 on weak footing. GDP growth was just 0.3 percent on a sequential basis, and was just 0.8 percent, year over year (bottom chart). Macron's economic goals will likely be challenged by the weak French economy. However, consumer sentiment in France is rising, a signal that Macron has the people of France's confidence.

HIGHLIGHTS OF THE WEEK

United States

• Markets started the week off on a good note on French presidential election results and fairly constructive earnings and economic data. The S&P500 flirted with record highs, and the VIX fell to its lowest level in more than two decades.
• Sentiment soured later in the week as soft inflation data overshadowed a relatively robust retail spending report, with sales up 0.4% atop of an upwardly revised March gain. Total CPI inflation decelerated from 2.3% to 2.2% in April with the core measure slowing from 2.0% to 1.9% on the month.
• Expectations for a Fed rate hike as of June pared back slightly, but remained above 75% through this morning. Unless data continues to disappoint, we expect the Fed will raise rates next month, with another hike likely later on in the year.

Canada

• Canadian housing starts pulled back somewhat in April, but recent strength left the trend measure at 214k units, its fastest pace since late-2012.
• The Canadian dollar was down slightly on the week. The loonie has underperformed its peers so far this year, and speculative short interest has reached all-time highs, reflecting concerns around the health of Canadian housing and mortgage markets.
• At present, fears of a U.S.-style housing crisis appear overblown. The most likely scenario remains that headwinds to the market continue to intensify as we approach 2018, leading to a gradual cooling.

UNITED STATES - SOFT INFLATION DATA PARES JUNE HIKE EXPECTATIONS

Markets started the week off on a forward foot with rising confidence in the global economy, helped by last Friday's strong U.S. jobs report, further enhanced by the French presidential election results. The price investors demand to protect against volatility dropped, with the VIX falling early in the week, and touching its lowest level since 1993. U.S. equities were also supported by relatively strong earnings reports early in the week, with the S&P500 flirting with the 2,400 point level. Meanwhile a mild rebound in oil prices, following the bullish inventory report, shored up energy stocks since mid-week. The mood soured somewhat by the end of the week as a relatively good retail sales report was overshadowed by weak CPI data.

The election of Emmanuel Macron as President of France, the centrist candidate who ran on a platform of reform, was expected and largely priced in by markets. Still, it was a welcome development for global investors following the protectionist tilt in popular sentiment across many advanced economies over the past year. The result comes alongside some improvement in economic fortunes. This week, the European Union revised higher its Eurozone and U.K. growth outlook, with industrial production and employment growth in France coming in better than expected recently. But, while the new president has some political capital, he faces significant hurdles to enacting the much needed pro-growth reforms, with much riding on the results of the legislative assembly elections to take place in a month.

The U.S. data calendar was relatively light until Friday. The NFIB Index of Small Business Optimism held up well, while labor market strength was further confirmed by a strong job openings in March and a decline in both initial and continuing claims in early-May. Investors also had a number of Fed speeches to digest. Most of the speeches stuck to the script telegraphed by last week's FOMC policy statement, suggesting the Committee viewed the early-year weakness as transitory, and expected a firming in 'hard' economic data during the second quarter. Most Committee members continue to see a fair chance for two more hikes this year, and see the Fed beginning to wind down the balance sheet late this year or in early-2018.

The Fed's expectations were only partly confirmed by this morning's data. April's retail sales were shy of expectations, but nonetheless indicated more consumption momentum into the second quarter given the upward revisions to March spending figures. On the other hand, consumer price data matched expectations for 0.2% m/m as far as the headline print, but came in weaker after excluding food and energy prices with the core measure up a mere 0.1% m/m. After the unexpected decline in March, the softness in April, which saw the headline and core inflation measures slip to 2.2% and 1.9%, respectively, is likely to somewhat quiet those worried about the Fed falling behind the inflation curve.

While the soft CPI numbers may embolden a more dovish tilt within the FOMC, we believe that the strong April producer and import price data, which typically leads consumer prices, should help support the case for a rate hike. Moreover, while the soft CPI data has slightly pared back expectations for a move next month, markets continue to price in odds near 75%. Ultimately, unless the data continues to disappoint, we don't expect the Fed will pass on the opportunity to raise rates next month.

CANADA - HOUSING CONCERNS KEEP LOONIE WEAK

It was a light week for economic data in Canada, and accordingly, markets did not see any major moves. The S&P/TSX equity index was down slightly at the time of writing, despite some gains in crude oil prices as the week progressed. Equity markets at the moment appear more focused on events related to Canadian housing markets, including the downgrade of major Canadian banks by credit rating agency Moody's. Concordantly, the Canadian dollar remained volatile, and appeared likely to end the week down, continuing the theme of weak performance this year.

In the only major economic datapoint of the week, Canadian housing starts pulled back a bit in April, dropping back a notch to 214k units after a red-hot March print (252k). The pullback was relatively broad-based: the volatile multi-family segment saw a sizeable drop (-33k units), but so too did the more stable single family construction (-9k). Ultimately, the pace observed in April is likely more in line with underlying trends, but more near-term volatility in the figures is likely as builders in Ontario digest the recently announced 'Fair Housing Plan'. Aspects of the plan are positive for housing supply, such as an accelerated project approvals process. Conversely, changes around assignment sale rules may dent demand and crimp future supply.

Despite all indications pointing to robust GDP growth in the first quarter of 2017 and a steady expansion thereafter, sentiment towards Canada appears to have soured recently, reflected in a currency that has significantly underperformed its peers (Chart 1). The U.S. administration's remarks on NAFTA certainly haven't helped, but the more likely culprit appears to be perceived weaknesses in the financial system underpinning the housing market. The events surrounding Home Capital Group were a catalyst, with non-commercial (i.e. speculative) short interest in the Canadian dollar spiking following the announcement of further regulatory investigation. Indeed, since then, short interest has continued to climb, reaching an all-time high last week (Chart 2; this week's positioning data will be published later this afternoon).

Although housing markets are the key risk to the Canadian economy, fears of a U.S.-style housing crisis appear overblown. A string of macroprudential tightening measures in recent years may not have had much of a cooling effect, partly due to falling interest rates, but they have helped to reduce risks by improving underwriting standards. While reliable data on the 'shadow' mortgage market is scarce, growth appears to have outpaced the overall market in recent years. Still, such lending is a relatively new phenomenon, and its share of outstanding mortgages likely remains small.

Thus, while the risk of a correction cannot be dismissed, the more likely scenario is one of mounting headwinds. These would take the form of a gradual rise in borrowing costs, stretched affordability, the ongoing impact of past and recent cooling measures, and the potential reduction of credit availability from marginal lenders. Together these should serve to cool the hottest Canadian housing markets as we move into the latter half of the year and into 2018. Some frictions in this process are inevitable, but on balance we continue to expect a gradual, orderly deceleration of housing activity.

Political risk to dominate thin calendar of economic events

The US dollar will finish the week ending May 12 higher across the board against major pairs. Despite the dollar rally losing steam as softer economic data was released the U.S. Federal Reserve kept the June rate hike on the table boosting the greenback on a monetary policy divergence basis. The central banks of New Zealand and England issued statements this week and made it clear that there are no rate changes coming soon, unlike the US central bank. The miss in inflation and sales could only highlight a temporary problem as the May 7 U.S. non farm payrolls (NFP) added 211,000 jobs still points to a solid recovery.

The market is pricing in a 73.8 percent probability that when it meets on June 14 it will raise interest rates to a 100-125 basis points range. Weaker US data has brought it down from 83.1 percent yesterday but taking Fedspeak into consideration it remains a firm possibility. Federal Open Market Committee (FOMC) members have seen the number of speeches they deliver increase which better prepares the market for upcoming decisions. The FOMC meeting in March was a great example as Fed members warned investors that they were not pricing in an upcoming rate hike. The meeting in June become a test of trust. The Fed has been typically vague in their timing but is now dropping far more hints without resorting to outright guidance.

The week of May 15 to May 19 will feature little in the way of economic events. The market will focus on data out of the UK, with UK inflation to be released on Tuesday, May 16 at 4:30 am EDT and retail sales on Thursday, May 18 at 4:30 am EDT. The Bank of England (BoE) kept rates unchanged last week and the central bank issued a warning of the lack of wage growth as inflation is rising to a forecasted 2.8 percent in 2017. The BoE also reduced economic growth forecasts to 1.9 percent as the pound has been weaker ahead of Brexit.

The EUR/USD lost 0.601 in the last five days. The single currency is trading a 1.0932 after investors sold the EUR following the results of the second round of the French presidential election. The victory of Emmanuel Macron was correctly forecasted by pollsters and while the market breathed a sigh of relief it also took sold the EUR as it deemed the currency would not keep gaining ground.

Dovish comments from European Central Bank (ECB) president Mario Draghi kept the currency from appreciating versus the USD. In the other hand U.S. Federal Reserve members are keeping the June interest rate hike alive by talking about the need to act sooner rather than later and keep the hope of four rate hikes alive this year.

The price of crude gained 3.08 in the last week. West Texas is trading at $47.59 after a massive drawdown of weekly inventories in the US ended a string of losses for energy prices. The Organization of the Petroleum Exporting Countries (OPEC) has also been active with comments around the success of its production cut agreement and the high probability of an extension to be announced at the meeting with other major producers on May 25.

The Energy Information Administration (EIA) reported a 5.2 million barrels draw for the week ending May 5. Gasoline inventories fell by 200,000 which is feeling optimism ahead of the start of the US driving season. The drawdown in US energy stocks boosted the price of oil as it lined up with OPEC's release of data confirming their production limits, but the fact that there is low demand for energy and US producers, not bound by any agreement, are ramping up production to take advantage of current price levels will keep the price of crude volatile.

The USD/MXN lost 1.372 percent in the last five days. The currency pair is trading at 18.7523 after the political uncertainty in the US is removing downward pressure on the Mexican currency as the topic of trade and immigration is not top of the US political agenda until the turmoil in the White House can be resolved. Oil prices have also boosted the performance of the peso with lower inventories in the US driving crude prices higher. Mexico is part of the OPEC production cut and is expected to take part in the extension that will be announced on May 25.

The MXN was trading higher after the disappointing sales and inflation data out of the US on Friday morning. The Mexican peso went form being one of the worst performers during the US presidential elections and up to the inauguration of Donald Trump, only to quickly regain ground in 2017. Economic fundamentals have not changed much in that time frame, but political risk and risk aversion have dictated the price of the peso as it is used as proxy for other emerging market currencies.

Market events to watch this week:

Sunday, May 14

• 6:45 pm NZD Retail Sales q/q
• 10:00 pm CNY Industrial Production y/y

Monday, May 15

• 9:30 pm AUD Monetary Policy Meeting Minutes

Tuesday, May 16

• 4:30 am GBP CPI y/y
• 8:30 am USD Building Permits
• 6:45pm NZD PPI Input q/q

Wednesday, May 17

• 4:30 am GBP Average Earnings Index 3m/y
• 8:30 am CAD Manufacturing Sales m/m
• 10:30 am USD Crude Oil Inventories
• 9:30 pm AUD Employment Change
• 9:30 pm AUD Unemployment Rate

Thursday, May 18

• 4:30 am GBP Retail Sales m/m
• 8:30 am USD Unemployment Claims

Friday, May 19

• 8:30 am CAD CPI m/m
• 8:30 am CAD Core Retail Sales m/m

*All times EDT

Next week's market movers

• In the UK, lots of key economic data are due out, among which inflation figures. However, with the recent BoE meeting now out of the way, we think that investors are likely to turn their attention primarily to developments surrounding the upcoming General election.
• In Canada, April's CPI rates may rebound following notable tumbles in March, but we doubt that this will lead to a material change in the BoC's dovish rhetoric.
• We also get key economic data from China, Australia, New Zealand, and Canada.

On Monday, during the Asian morning, we get China's retail sales, industrial production and fixed asset investment data, all for April. The forecast is for all of these indicators to have slowed in yearly terms. Indeed, both of the nation's official and Caixin manufacturing PMIs for the month showed that production continued to rise, albeit at a reduced pace, which supports the industrial output forecast. Meanwhile, the consensus for slowing retail sales is somewhat supported by the notable slowdown in imports during the month.

From New Zealand, we get retail sales for Q1. The forecast is for sales to have accelerated somewhat, in both quarterly and yearly terms. The case for another quarter of solid sales is supported by the New Zealand electronic card transactions indicator, a gauge of the nation's retail sales, which remained robust throughout the quarter. In addition, the continued increase in the nation's population growth due to strong net migration, supports further the forecast.

On Tuesday, the main event will probably be the release of the UK CPI data for April. The forecast is for both the headline and the core rates to have risen notably, something supported by the nation's services PMI for the month, which indicated that service firms raised their prices charged at the fastest pace since 2008. Indeed, in its latest Inflation Report, the Bank of England also anticipates inflation to have accelerated notably in April. In fact, the BoE forecasts suggest that the headline CPI rose to +2.7% yoy in April, while the market consensus currently anticipates a +2.6% yoy rise. As such, should inflation accelerate by less than what the BoE forecast, this would be yet another factor supporting the case for no action by the Bank in the foreseeable future. Considering that this is what is anticipated by financial markets as well, we think that sterling's forthcoming direction over the next weeks is likely to be decided primarily by news surrounding the upcoming General Election, rather than developments regarding monetary policy. In our view, incoming opinion polls that show the Conservatives maintaining or extending their current lead could support sterling as we approach the Election Day (June 8th).

On Wednesday, the UK employment data for March are coming out. In the absence of a forecast, we see the likelihood for the unemployment rate to have held steady, while average weekly earnings may have accelerated following three consecutive months of slowdowns. Our view is based on the UK services PMI for the month, which showed that the rate of job creation in the UK's largest sector was only marginal, and that firms reported stronger salary pressures. Accelerating nominal wages combined with the steady inflation rate for the month could turn real wage growth back to positive.

On Thursday, during the Asian morning, Australia's employment data for April are due out. The forecast is for the unemployment rate to have remained unchanged, and for the net change in employment to have remained in positive territory following a remarkable surge in March. The forecast for another month of employment gains is supported by the ANZ job ads indicator, which showed that job advertisements accelerated in April. This suggests that the labor market may have continued to tighten, something that could ease further some of the RBA's concerns regarding employment indicators.

From the UK, we will get retail sales data for April. Without a forecast available, we see the case for sales to have rebounded notably, following a bigger-than-expected plunge in March. Our view is based on the BRC retail sales monitor, which skyrocketed to +5.6% yoy in April from -1.0% yoy previously. In addition, the fact that the TR/IPSOS and the Gfk consumer sentiment indices both rose during the month, enhances the argument for a rebound in sales.

On Friday, we get Canada's CPI data for April, but no forecast is available yet. Our own view is that both the headline and the core CPI rates likely rebounded following notable tumbles in March. This view is consistent with the nation's Markit manufacturing PMI for April, which showed another robust increase in factory gate prices. A rebound in these rates would likely be an encouraging development for BoC officials, as it could confirm that the softness in March was only transitory. Nevertheless, we doubt that it will lead to a material change in the Bank's dovish bias. The BoC made it clear that it is going to maintain a cautious stance until uncertainties around trade clear up, something we don't see happening anytime soon given the recent tariffs from the US government

• Don't Be Scared & Stay Long EM Risk- Peter Rosenstreich
• Do Not Get Carried Away By Oil's Dead Cat Bounce - Arnaud Masset
• UK In Focus, BoE Keeps Its Rates Unchanged - Yann Quelenn
• USDHKD Heads for Intervention Threshold - Peter Rosenstreich
• Gold & Metal Miners

Economics - Don't Be Scared & Stay Long EM Risk

Much has been made of the historically low volatility seen across asset classes. Yet with key risk events over and lack of compelling drivers, low volatility environment is likely to remain. Of course there can always be a rogue iceberg that could derail the positive sentiment, but guessing on swan-like-trigger is unproductive. Investors should remain caution but hiding is not an investment strategy. Fears that refocusing on policy "normalizations" would damage risk appetite have not materialized as meaningfully shift is still months away. Still globally lose monetary policy environment has allowed markets to shrug of risk events such as Brexit, rising protectionism, geopolitical uncertainty etc. In addition, US President Trump destabilizing behavior has faded as an issue with most recent actions (firing of Comey) had a limited lasting market impact. And we don't expect that Feds shallow rate path to spark significantly higher rates or rotation out of risky assets. The Feds 14-June rate decision expected 25bp hike is already priced in. While EM economic growth data has further improved (as protectionist policy worries have declined) and subdued inflation indicate that more than a few EM Central Banks will cut rates this years. We see upside for EM growth outlook above 4.5%, so a bit of support from commodity prices will give EM another strong bound.

Judging by what only we can see there will be continued flow in EM carry trades as their risk metrics improve. Idiosyncratic risk such as North Korea, Mexico elections and China tightening is unlikely to snowball into a EM sell-off despite the large size of the current trade. Interestingly, the soft commodity prices have suspended investment into EM for some investors causing EM currencies to lag. We suspect there is still time to reload on high beta EM that also carry significant high carry such as TRY, RUB, IDR, MXN and BRL..

These currencies are most likely to benefit from the current low volatility environment. We especially like the EM Asia currencies as regional growth, despite credit tighten in China continue to improve. While news that US and China have agreed to a trade deal, while small in trading volume, suggest that a trade war or punitive currency policy is unlikely.

Crude Oil - Do Not Get Carried Away By Oil's Dead Cat Bounce

After falling as much as 20% in the second half of April, crude oil is making a comeback as the West Texas Intermediate bounced back at around $48 a barrel, up roughly 3% over the week. After the decision of OPEC and its allies to cut supply back in November last year, investors entered into a wait-and-see mode and took their time to assess the effectiveness of the OPEC decision. The market's enthusiasm was only short-lived but the WTI stabilised at between $48 and $55, during the first quarter, at least. It is quite clear that OPEC is always a trifle late. A few years ago the Cartel, realising that the US shale industry could jeopardise its dominant position in the oil business, tried to nip them in the bud by flooding the market with cheap oil. This move stopped any new investments in upstream exploration and killed the momentum of the US shale industry. However, the move came quite late as North America's frackers were already too efficient and were able to lower their break-even price well below $50 a barrel.

The problem now, is that OPEC countries are struggling with cheap oil prices, even though their breakeven prices are much lower (around $20 a barrel for Saudi Arabia, for example), as they need a higher price to balance their state budgets. To lift prices, OPEC trimmed production last year and members are currently discussing to extend the cut.

Unfortunately for OPEC and its allies, the US shale industry, which does not participate to the effort, is the primary beneficiary of those production cuts. Indeed, the higher the price, the higher the number of profitable US wells.

The number of US oil and gas rigs have been increasing steadily since May 2016 to reach 703 last week. In average, US drillers added 10 new rigs per week over the last 6 months.

Against a backdrop of supply glut and subdued demand, we believe that the recovery in oil prices is quite limited, especially given the current set-up. The Cartel will have to cut production more aggressively and for longer if it wants to lift prices substantially. Only in the latter case, may we see WTI above $55 a barrel, but again, the primary beneficiary will be the US shale industry. We do not rule out a recovery in crude oil prices in the short-term. However, we do not believe that a TWI above $55-60 is sustainable without significant improvement of the fundamentals.

Economics - UK In Focus, BoE Keeps Its Rates Unchanged

The Bank of England has decided to keep its interest rate unchanged at 0.25% against the backdrop of political uncertainties. Indeed, the 8th of June New General Election will take place, after Theresa May asked the Queen Elizabeth to dissolve the parliament. UK Prime Minister is attempting to gain a stronger majority before negotiations on the article 50 with the EU.

This is why the British central bank favoured the wait-and-see mode last Thursday. Political uncertainties regarding the 2-year negotiation period prevail. Anyway, the BoE has gained some time since last year as the UK economy had clearly benefited from pound devaluation after the Brexit vote. The inflation is now standing at 2.3% y/y. Yet the growth seems still a bit slow (0.3% for Q1 GDP). The unemployment rate keeps declining and is now standing at a 12-year low.

However, the UK is also facing some difficulties. The UK GDP missed forecasts and we may not see growth above the GDP forecasts within the next few years. Retail sales are falling at the fastest rate in seven years, yet, the UK economy is not collapsing as some had promised amid the Brexit campaigning. The UK is doing better than many western countries, which are still struggling with high unemployment rates, low growth and low inflation.

At this point, we do not believe that the BoE will provide any more hints regarding a possible tightening within the next few months. Inflation is getting stronger and this may be one opportunity to kill debt for the BoE. We recall that the debt-to-GDP ratio is 90% but however likely a rate hike of 25 basis point is, this would not make a significant impact on inflation and growth. Another point of concern now for the BoE is the level of real wages which are falling.

There is also one important thing to be said, the UK trade deficit is still very large despite the weaker pound. The trend is clearly negative and amounts for £3.6 billion. We believe that the overseas demand is falling for UK goods certainly on fears that the trade relations with the UK are unclear at the moment.

The future of trade relations are questioned a lot and this drives UK exports lower. The question is now to know whether there will be trade tariffs on importing product from the UK that would hit European business. This is the one reason why UK is facing a growing trade deficit. Replacement opportunities are now being searched for by foreign businesses. We know that long-term relations are always favoured but why would you import from the UK now if there is a threat that trade agreements in the future will ruin the profitability of your business by increasing costs.

Article 50 negotiations will obviously be key. Any positive development will provide a good traction for the UK economy and we must not forget that the UK has a certain number of bilateral agreements that existed before joining the EU. The uncertainties regarding the negotiations are sending the GBP lower. We believe the Sterling is largely undervalued and will strengthen when negotiations will unravel.

The election of Emmanuel Macron in France does not change much in our view even though he can be qualified as a hard Brexiter and he believes the UK has more to lose than the EU, which has the upper hand on the coming negotiations. He also said that the UK is now becoming a "US vassal state". Macron mentioned several times that he wants to make the UK exit harder as he does not want to provide the signal that it is easy to leave the EU.

FX Market - USDHKD Heads for Intervention Threshold

The long USD short HKD trade continues uninterrupted, clearly having no fears of preemptive official intervention at this point. USDHKD increased to 7.7891 in Asian trading well below the Hong Kong Monetary Authority's 7.85 upper band (7.75 to 7.85 convertibility range). HKMA has expressed commitment to the USD-linked exchange rate (expected to intervene at 7.8), yet the rapid HKD deprecations spawn questions about the sustainability of the peg. The widening US-HK interest rate differential makes borrowing cheap in HK and buying in US a tempting candidate for carry traders. Yet, Hong Kong's annual GDP growth is likely to have accelerated as 1Q GDP came in at 4.3% (above 3.7% exp). The read indicates that household spending and service exports remains solid. April PMI indicates that growth momentums will on a solid pace. From a fundamental standpoint Hong Kong is strong.

Concerns over Hong Kong's attempt to slow house price appreciations on tighter lending practices and increase in purchase tax has pushed Hibor (1-month Hibor 0.38 from 0.75 in Jan) below the US equivalent while high levels of interbank liquidy lower demand for HKD. In addition, China is also in the process of tightening financial conditions and expectations of gradual Fed interest rate increases and reduction in balance sheet are all generating excessive outflows. However, the hazard of waiting is that speculative short selling of HKD could complicate the HKMA objective and even threaten the stability of the banking system. Waiting could force the HKMA to intervene but possibly raise interest rates. Given the high level of leverage in Hong Kong households, a sharp increase in interest rates would pressure debt-holders and possibly constrict consumption (pressuring growth), a dangerous spiral. Currently given the manageable fundamental backdrop and the HKMA's massive $3.5 trillion reserves, we see no threat to the USD peg. Should we see USDHKD at 7.8 that would be a tempting short.

Themes Trading - Gold & Metal Miners

The sudden collapse in commodity prices in 2014 sent mining stocks into free fall. In the long term, however, precious metals - and gold in particular - are the perennial go-to sources of protection against inflation and economic downturns, something investors should be looking out for. The gold market is dynamic, and there are compelling reasons why gold producers could rally. Consumer demand remains solid, with around 2,500 tons of gold mined worldwide every year. Over the long haul, gold as a commodity has appreciated by more than 287% over the past 15 years; by comparison, the S&P 500 has gained less than 44% over the same period. In a period of central bank policy shifts, it is reasonable to envisage a rebound in metal prices - something mining stocks will benefit from. Gold miners are a good way to tap into the benefits of precious metals without paying storage costs.

Given the sharp debasement of precious metal over the last few weeks, a reversal is more than likely. Take advantage of the move.

Although April retail sales were below consensus, the March revision shows a stronger finish for the first quarter and a relatively modest start in the second quarter.

Retail Sales Improve in April

Retail sales increased a less than expected 0.4 percent in April, but March's retail sales were revised up from -0.2 percent to 0.1 percent, which will help to strengthen personal consumption expenditures (PCE) at the end of the first quarter and change the narrative at the beginning of the second quarter. Retail sales excluding automobile sales were also lower than expected, 0.3 percent versus 0.5 percent. However, they were also revised upward from a flat reading in March to a 0.3 percent increase. A very similar situation occurred with retail sales excluding automobile sales and gas, which increased 0.3 percent versus market expectations of a 0.4 percent increase. However, March sales were upped to 0.4 percent growth compared to an original increase of 0.1 percent.

The strongest sector in April was nonstore retailers, where sales increased 1.4 percent followed by sales at electronics and appliances stores, which increased 1.3 percent. Electronics and appliance store sales has been one of the weakest sectors of retail in the past year but has been very strong lately, increasing another 2.2 percent in February. Motor vehicle sales increased 0.7 percent and point to a recovery in automobile sales after a weak first quarter of the year.

On the housing market side of retail sales, the news was mixed, with building material and garden equipment and supplies dealer sales increasing a strong 1.2 percent but not enough to recover from the 1.7 percent decline in March. However, furniture and home furniture store sales were down 0.5 percent, perhaps a payback from a strong 1.5 increase in March.

Another sector that suffered a payback was clothing and clothing accessories store sales, which declined 0.5 percent after a strong 1.9 percent rise in March while general merchandise store sales continued their decline, this time dropping 0.5 percent. A positive development in this sector was a second consecutive increase in department stores sales, up 0.2 percent in April after a 0.1 percent in March. Still, the sector was down 3.7 percent versus April of last year.

Control Group Sales Shows Upward Revision for PCE in Q1

Perhaps the most important data point for this release was the upward revision to all the components of retail sales in March. This is especially true for control group sales, which was upwardly revised to 0.7 percent in March. For April, control group sales were up a less than expected 0.2 percent. That is, the upward revisions to March will help first quarter GDP growth but will likely lower the strength of PCE that we were expecting coming out of the gates in the second quarter of the year.

Confirming March's unexpected decline was "transitory," headline and core CPI inflation rebounded in April. A return closer to trend performance at the start of Q2 keeps the Fed on track for a June rate hike.

Food and Energy Prices Rise

Extending the theme we have witnessed this week with gains in both headline and core measures of import and producer prices, consumer inflation, as measured by the Consumer Price Index (CPI), also revealed a rebounding performance during the month of April. Admittedly a lower than expected rebound, headline CPI increased 0.2 percent in April from the 0.3 percent decline in March. Energy prices, which tend to be a significant factor in the monthly headline performance, rose 1.1 percent on the month, as all three major components - gasoline, natural gas and electricity - increased. Crude oil prices have fallen substantially in recent weeks and will likely influence next month's headline CPI performance.

Consumer food prices extended its recent rising streak to four months, but underlying details were on the soft side. The index for food at home prices rose 0.2 percent, but was largely driven by an outsized gain in fruits and vegetables (2.2 percent). Four of the five major grocery store food components fell on the month. Food prices away from home edged up 0.2 percent in April and are up a modest 2.3 percent pace over the past year.

Excluding food and energy, consumer prices increased a modest 0.1 percent in April following the unusual March decline of -0.1 percent. Shelter costs, which were a contributing factor to March's core CPI decline, returned to trend, up 0.3 percent. An outsized increase in tobacco, 4.2 percent, also underpinned the core. Outside of those two components, however, the core inflation environment remains soft. Medical care, communication (including wireless services), new & used cars and trucks, and apparel declined for the second month. The three-month annualized rate of core CPI has fallen from a recent high of 3.0 percent to a low of 0.6 percent - pointing towards further moderation in the year-over-year rate in the coming months (middle chart).

Economic Backdrop Still Supports June Rate Hike

The key question heading into today's CPI report was whether the unexpected decline in March consumer inflation was "transitory" as the Fed and consensus believed, or the start of a new concerning trend. While April's performance did rebound, the soft underlying performance is unlikely to quench concerns several Fed officials have expressed over the likelihood of reaching the Fed's 2.0 percent target. That said, the labor market remains strong and communication from most Fed officials remains resolute that they remain focused on their tightening monetary policy path. While the April CPI performance was weaker than we had projected, our overall economic growth outlook remains in place and we do not think the recent soft inflation prints will deter Fed officials from raising rates at the June meeting.

USD/CHF - 1.0020

Most recent candlesticks pattern : N/A

Trend                                    : Near term up

Tenkan-Sen level                  : 1.0047

Kijun-Sen level                    : 1.0047

Ichimoku cloud top                 : 1.0083

Ichimoku cloud bottom              : 1.0056

Original strategy :

Buy at 1.0015, Target: 1.0115, Stop: 0.9980

Position : -

Target :  -

Stop : -

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Current selloff has dampened our bullishness and suggests top has been formed at .1.0100, hence consolidation with downside bias is seen for retracement of recent rise towards 0.9980 (50% Fibonacci retracement of 0.9859-1.0100), break there would add credence to this view, bring further fall to 0.9950-55 (61.8% Fibonacci retracement) but price should stay well above previous resistance at 0.9903, bring rebound next week.

In view of this, would be prudent to stand aside in the meantime. Above 1.0045-50 would bring recovery to 1.0080-85, however, price should falter below strong resistance at 1.0100-8 and bring further consolidation later.