Markets were continuing to monitor UK political developments during the day.
US retail sales data was much weaker than expected for December with a sharp monthly decline. US bond yields, however, moved significantly higher despite the weaker sales report. There were strong expectations of a March rate hike despite the sales data.
Risk appetite was slightly more fragile after the data, but equities were resilient. There was choppy trading in Wall Street equities with slight net gains. Asian markets secured net gains on Monday as China sanctioned a small cut in interest rates.
The dollar posted sharp net gains from 2-month lows as yield trends boosted support. EUR/USD retreated to near 1.1400 before stabilising. Sterling overall held firm, but GBP/USD dipped below 1.3700 amid the stronger dollar. Commodity currencies retreated sharply as the US dollar strengthened.
On Friday, the German economy Ministry stated that ongoing supply bottlenecks are likely to persist for a while, but also insisted that the upward trend in inflation would weaken noticeably from January. ECB President Lagarde stated that monetary accommodation is still needed for inflation to settle around 2% over the medium term.
US retail sales declined 1.9% for December following a revised 0.2% increase the previous month and much weaker than consensus forecasts of a 0.1% decline. Underlying sales declined 2.3% for the month while the control group recorded a 3.1% decline following a revised 0.5% retreat in December.
The University of Michigan consumer confidence index retreated to 68.8 for January from 70.6 previously and slightly below consensus forecasts to 70.0. There was a net decline in the current conditions index and sharper retreat in the expectations index. The one-year inflation expectations edged higher to 4.9% from 4.8% with an increase in the 5-year index to 4.9% from 4.8% as markets continued to focus on inflation.
The Euro initially failed to make further headway and the dollar posted significant gains during the US session despite the much weaker than expected sales data. Commodity currencies retreated and EUR/USD dipped to lows around 1.1410. CFTC data recorded a switch to a small net long Euro position in the latest week.
On Sunday, ECB council member Schnabel stated that a premature rate hike could choke an economic recovery. EUR/USD was little changed and traded around 1.1415 in early Europe on Monday with activity likely to be dampened by a US market holiday as markets assess long-term capital flows.
US industrial production declined 0.1% for December compared with expectations of a 0.3% increase. US Treasuries briefly strengthened following the US data, but failed to hold the gains. From lows just below 113.50 after the US retail sales data, USD/JPY rallied to near 114.00 amid wider gains.
New York Fed President Williams stated that the central bank is approaching a decision to raise interest rates while the timing of hikes will be based on a wide range of data. The Federal Reserve will now be in a blackout period ahead of the January 26th policy meeting with markets assuming that there will be signal at that meeting of an interest rate hike at the March meeting. CFTC data recorded a sharp increase in short yen contracts to over 87,000 in the latest week from 53,000 previously which suggests that funds have been caught out and forced to liquidate as the dollar dipped sharply.
Chinese GDP increased 4.0% in the year to the fourth quarter of 2021 and above consensus forecasts of 3.3%. Industrial production was also above expectations, but retail sales growth was well below expectations at 1.7% from 3.9% previously. The central bank warned over supply-side issues and also nudged interest rates lower with a cut in the medium-term financing rate to 2.85% from 2.95%, the first cut since April 2020. The rate cut helped underpin risk appetite.
US yields were little changed while Asian markets posted net gains and USD/JPY posted further net gains to around 114.50 with EUR/JPY around 130.65.
UK Foreign Secretary Truss stated that there had been good talks with EU Commission vice-president Sefcovic and commented that the two sides would intensify talks to resolve post-Brexit issues. There was a slightly more cautious tone from Sefcovic who commented that some issues needed to be taken off the table, although there was also a survey from Northern Ireland which suggested that companies were making headway.
Markets were continuing to monitor UK political developments during the day. GBP/USD was unable to make further headway during Friday and a dip below the 1.3700 level helped trigger further selling after the New York open. GBP/EUR was unable to make any headway and settled below 1.1980.
CFTC data recorded a further net decline in the short Sterling position to near 29,000 contracts from 39,000 previously as short covering continued. Immediate political tensions eased slightly, but Prime Minister Johnson remained under pressure with GBP/USD around 1.3670 on Monday as GBP/EUR held around 1.1980.
|09:00||CPI (EU Norm) Prelim YY(JAN)||3.90%|
|09:00||CPI (EU Norm) Prelim MM(JAN)||0.40%|
|09:00||CPI (EU Norm) Final MM*(JAN)||0.50%|
|09:00||CPI (EU Norm) Final YY*(JAN)||4.20%|
|10:00||Euro-Zone Core CPI (Y/Y)(DEC 01, 2021)||2.60%|
|10:00||Euro-Zone CPI (Y/Y)(DEC, 2021)||4.90%||4.90%|
|10:00||Euro-Zone CPI (M/M)(DEC, 2021)||0.40%|
|13:30||CAD Foreign Securities Purchase(NOV, 2021)||23.92B|
|13:30||CAD Manufacturing Shipments (M/M)(NOV, 2021)||-3.00%|