Chinese Economy Grew 5% in 2024 (if You Believe it), UK Retail Sales Disappoint, and "Day One" Looms

Overview: The US dollar is firmer against most of the G10 currencies, but the tone is one of consolidation. Trump's inauguration on Monday, and the US markets are closed for the Martin Luther King holiday. Investors, businesses, and foreign countries have been warned of action on day one. Meanwhile, the yen is paring yesterday's gains, though the market anticipates a BOJ rate hike at the end of next week. The UK's retail sales cap a string of soft data. The meltdown in Gilts ended this week, but sterling remains vulnerable. China's Q4 GDP was a little stronger than expected, but few put much credence in the data. 

Equities in Asia Pacific today were mixed, but the MSCI regional index posted its first weekly gain of the year. Europe's Stoxx 600 is up for the third consecutive session, and it is putting the final touches on the fourth weekly gain. It is closing in on the record high from last September. US index futures are trading with a firmer bias. Bonds are also trading higher. European benchmark yields are off 1-4 bp today. The yield on the 10-year US Treasury is slipping below 4.60%. It peaked this week near 4.80%. Gold is softer, consolidating a small advance this week, its third consecutive weekly gain. February WTI is firm, trading between about $78.65 and $79.45 so far today. It settled near $76.60 last week, and this is the fourth weekly gain in a row.   

USD: The Dollar Index recorded session highs yesterday, marginally taking out Wednesday's high after the retail sales report. It then reversed course and set a new session low near 108.80. Still, the tone is one of consolidation. Thursday's low was near 108.60, while the 20-day moving average, which the Dollar Index has not traded below in a month, comes in around 108.75 today. So far, the Dollar Index is trading within yesterday's range, but the consolidation still looks constructive. US markets are closed on Monday for Martin Luther King Day, which is also the inauguration. Bessent told Congress the right things: concerned about the deficit trajectory, supports Fed independence, and wants the USD to retain its role as the major reserve currency. There seemed to be little market reaction. Instead, comments by Federal Reserve Governor Waller seemed to continue his dovish campaign and the market has gradually pushed the next rate cut, which briefly had been not fully discounted until 2026 after the US jobs data, is now almost back to June (~98%). It was about 75% at the end of last week. This week's PPI and CPI helped forge a median view that the headline PCE deflator may have accelerated to 2.6% from 2.4%, while the core looks steady at 2.8%. Today's housing starts and industrial production are among the last important real sector data that will shape Q4 GDP estimates which will be reported on January 30, the day after the FOMC meeting concludes. Estimates have been increasing and now appear to be around 3%. 

EURO: The euro settled last week near $1.0245, culminating a six-week decline. A close above there today would mark only the third weekly gain since the end of September. The stabilization of the price action after the decline in a new two-year low at the start of the week slightly below $1.0180, the technical tone remains fragile. The momentum indicators are not trending higher and selling into rallies still appears to be the preferred strategy. The euro also seems vulnerable to disruptive action by Trump following Monday's inauguration. However, much news is already discounted, and we note that the US two-year premium over Germany is lower for the fourth consecutive week. It is hovering around 200 bp, which has not been seen since the Fed's cut on November 7, the same day the euro's recent peak was recorded.

CNY: The dollar remains pressed against the upper end of the 2% band that it is allowed to trade against on onshore yuan. The PBOC controls the band by setting the reference rate. By setting it little changed in recent days, the PBOC is ensuring that the dollar does not appreciate much more against the yuan. Still, it seems like a stretch to claim that a stronger yuan is in China's interest so some sort of grand deal, like the Plaza Agreement is possible. Fat Chance. Americans may be the only ones to romanticize the Plaza Agreement. Beijing seems to view it as a capitulation by Japanese officials leading to lost decades. Neither a strong nor weak yuan is in China's interest. Rather what is in China's interest is not allowing the US to have asymmetrical advantage of a depreciating dollar. The dollar continues to trade broadly sideway against the offshore yuan. It remains in the range set on December 31 (~CNH7.3050-CNH7.37). Because Beijing closely manages the exchange rate, it is not sensitive to Chinese economic data. Today's China reported Q4 GDP rose 5.4% year-over-year and slightly less for all last year (5.0%). Of note, China retail sales rose 3.5% in 2024, and many observers say China's consumption is weak. US retail sales rose 3.6% in 2024, and observers say this is strong. Industrial output was 6.2% higher year-over-year in December. Property investment continued to fall, though slump in property sales slowed, while house prices, new and used, fell further. The surveyed jobless rate rose to 5.1% from 5.0%. 

JPY: The dollar was sold briefly below JPY155 earlier today for the first time in a month. Speculation is running high that the BOJ will hike rates at the end of next week. However, the dollar has recovered to almost JPY155.85 in Europe. Barring market turmoil next week, which may be a significant caveat given Trump's inauguration and rash of actions threatened on "day one," the market has a 25 bp hike nearly fully discounted. The swaps market does not have the next quarter-point hike discounted until toward the end of year. 

GBP: Sterling has been the worst performer among the G10 currencies, to start the year, losing around 2.5%. The Swedish krona is the second weakest, and it is off 0.80%. A combination of softer inflation and weaker data saw sterling's down draft extend for the third consecutive week. Sterling has risen in three weeks since the end of Q3 24. However, the week's low was set on Tuesday near $1.2100. It still looks vulnerable, even though the pressure from the Gilt market has ebbed. Initial support is seen near $1.2150, has been approached today following the disappointing retail sales report. A break exposes $1.2100. Earlier today, the UK reported a 0.3% decline in December retail sales. The median forecast in Bloomberg's survey was for a 0.4% gain. The year-over-year pace is 3.6%, not the 4.9% pace expected. Recall, that unlike most other countries, the UK reports retail sales on a volume not price basis. The market has upgraded the likelihood of a BOE cut on Feb 6 to a little more 90% from almost 75% a week ago. 

CAD: The Canadian dollar is nearly flat on the week coming into today's session. In fact, the past eight sessions the greenback has been confined to the range set January 6 (~CAD1.4280-CAD1.4450). It has held above CAD1.4300 this week and approached the upper end of the range on Monday. It has pushed above CAD1.4400 in European turnover. After narrowing for seven consecutive sessions, the US two-year premium over Canada has widened for the past two sessions. It is around 127 bp and settled last week a little above it. The Canadian dollar has drawn little succor from the four-week, roughly $10 a barrel increase in February WTI. While countries debate how to respond to US tariffs, Canada is threatening proportionate retaliation. Canada is the largest buyer of US-manufactured products. 

AUD: The Australian dollar recovered from the lowest level since April 2020 (~$0.6130) seen Monday. It stalled in the past two sessions in front of $0.6250. Since the high was recorded, the Aussie has found support near $0.6190. Barring a significant setback in North America today, a six-week slide in the Aussie has ended, matching its longest slide in a decade. The futures market continues to favor an RBA rate cut next month but at around 2/3, it is off the recent peak a little above 75%. There is a trendline drawn off last September's (~$0.6940) and November (~$0.6690) highs and comes in today around $0.6245 and just above $0.6200 at the end of next week. 

MXN: The Mexican peso fell is off about 0.6% this week against the US dollar, making it among the weakest of the emerging market currencies. It seems particularly vulnerable. President Sheinbaum has pushed back and illustrates that one type of reaction to resurgent American nationalism is to add to the fuel of other nationalisms. Mexico is at risk that the near-shoring and friend-shoring thrust is not good enough for the new US administration that will encourage onshoring. Later today, Sheinbaum is poised to announce Mexico's own import-substitution strategy, especially imports from China, which may also impact US companies operating in Mexico. The dollar snapped a three-day pullback against the peso yesterday. It jumped1.8% against the peso yesterday to almost MXN20.85. The dollar rose to MXN20.9380, its highest level since July 2022. It has pulled back, but initial support may be near MXN20.80. 

  

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