Let’s touch on the interesting data from this week’s retail sales. The fundamentals are not supportive for consumer spending, yet retail sales continue to climb. While it is true that this is a nominal measure, even adjusting for inflation, consumers are spending more. It might be tempting to cheers on the resilience of consumers in the US, but the looming power of spending gives businesses no incentive to foresight price increases, therefore making the task of getting inflation down to targets a lot more difficult for policy makers. With that being said, the FED has already raised its ST interest rates to the highest levels since the 1980-1982 tightening cycle
In the FX market, DXY looks to have found a bottom at 106, and has appreciated 1.84% so far this week. The relief rally for the US dollar follows the heavy sell-off in recent weeks on the back of building optimism over both a dovish shift in FED policy and an improving outlook for growth in China next year driven by speculation over an easing of COVID restrictions and more policy support provided for the housing market. Next week in the market we’ll be looking for this relief on the US Dollar to extend into the 108 region. US yields are now at the steepest yield curve inversion since 1982: US 2-year yields are now nearly 63 basis points above rates on 10-year notes. Potentially hinting at a not so smooth landing for US bond markets and the USD, as expectations for FED monetary policy decisions remain up in the air.
However, as we approach December, we are still yet to position ourselves for the next FOMC meeting on the 14th. We’ll be keeping a close eye on FOMC members ahead of the meeting, and their overall tone. But, it is important to note that a more resilient US economy will keep pressure on the Fed to keep tightening policy unless inflation falls back more quickly than expected. Therefore, we’ll be monitoring the labour market and Yields closely before favouring either a 50BP rate hike over an additional 75BP.
At the current minute, for us, it’s way too early to be calling tops and to be leaning into a USD bearish stance on the market.