Week Ahead Fed Minutes to Guide USD After Retail Sales Flop

Soft inflation and retail sales raise US growth concerns

Central bank credibility is bruised as markets do not seem to follow the guidance from policy makers. The latest example was the rate cut and dovish rhetoric by the Reserve Bank of New Zealand (RBNZ). The central bank cut rates by 25 basis points and made strong comments about the negative effects of the overvalued NZD with a promise to favour further easing down the line. Investors were anticipating a bolder rate cut than the one that left the benchmark interest rate at an all time low of 2.00 percent and the currency appreciated which ran counter to what the RNBZ wanted. The European Central Bank (ECB) and the Bank of Japan (BOJ) have had similar surprises from market reactions to their monetary policy announcements. The Bank of England (BoE) managed to convince the market when it cut rates earlier in August and went above expectations on its quantitative easing program but with rising headwinds it is unclear if they can keep the trust of the market for long.

The U.S. Federal Reserve has pulled back its forecasts of tighter monetary actions as the global economy is slowing down much faster than anticipated. Economic shocks in China and the continuing saga of the Brexit vote have put pressure on other central banks to act to avoid the pull of deflation of their economies. The U.S. economy by contrast is growing and even if the pace of growth has slowed down indicators such as the strong employment data have kept dollar anxiety at bay. The Fed can afford to be cautious and wait for the right economic conditions before it moves again, this is a luxury few of its global counterparts enjoy but central bank patience will weigh on the dollar as it pressures it downward.

The July Federal Open Market Committee (FOMC) meeting notes will be released on Wednesday, August 17 at 2:00 pm EDT. The July FOMC meeting did not bring any surprises and the fallout from the British vote to leave the European Union no rate hike was expected but the tone of the Fed was more hawkish with the addition of the line: “Near-term risks to the economic outlook have diminished”. Traders will be looking forward to the release of the minutes from the July meeting looking for clues on the probability of the next Fed rate hike. The U.S. presidential elections are a going concern as the September FOMC meeting could be too sensitive timing wise to tighten rates ahead of the November vote.

The EUR/USD gained 1.13 percent in the last 5 trading days. The single currency gained versus the dollar as more cracks appeared on the armour of the U.S. economy during the week. The USD rally that started with the release of the U.S. non farm payrolls (NFP) that added 255,000 jobs could not be sustained as American productivity is still contracting and the positive signs for the much-awaited return of the consumer have been exaggerated. The currency is trading at 1.1180 after the weak retail sales data took it briefly above the 1.12 price level.

Retail Sales Disappoint in July

U.S. retail sales were flat in July and core retail sales unexpectedly shrank by 0.3 percent as consumers pulled back on spending. In the U.S. consumption can account for as much as two-thirds of total output and the impressive gains in the second quarter could be an outlier instead of setting a positive trend. Inflation data also delivered grim news with producer price index (PPI) posting a fall of 0.4 percent as American companies paid less for inputs despite strong labor costs in July and signalling that inflation in the U.S. is muted which puts the U.S. Federal Reserve rate hike further in doubt.

Another FOMC Minutes Surprise like in May?

The Fed surprised in July with a more upbeat statement than was anticipated. The American central bank downplayed the impact of Brexit as it became clear the historic decision would not play out in the short term as there are still doubts on when the fabled article 50 will be invoked kickstarting the process that will end up with the U.K. leaving the European Union. The July meeting was not followed by a press conference leaving traders with only the brief statement to guide them until the minutes are released three weeks later. In current market conditions the practice of releasing the meeting notes later is becoming outdated as a lot could and has happened since the meeting.

Three Week Waiting Period to Release Minutes Outdated?

The Bank of England (BoE) under the leadership of Governor Mark Carney has done away with the wait period between the monetary policy meeting and the release of the notes. In the U.K. the minutes are now released alongside the statement. It is interesting to note that the last Fed meeting without a press conference was in April. The statement for that month was not remarkable, but no so the minutes that seemed to show an unexpected hawkish Fed. The language and topics of conversation made markets rebalance their forecasts and for a brief moment it put the June FOMC meeting back in the picture for a rate hike. Traders will be looking for a repeat surprise as Chair Yellen and the rest of the voting members expand on the reasoning around diminished risks. Those risks might not be as diminished as even with strong back to back employment reports the U.S. economy has not been able to create inflation and it is worrisome that consumers are reducing purchases despite low prices. Kansas City Federal Reserve President Esther George was once again the lone dissenter with a vote for higher rates in July. Voting FOMC member George will be the host of the central bank monetary policy in Jackson Hole Symposium in August 25-27 where academics and central bankers will focus on “Designing Resilient Monetary Policy Frameworks for the Future,” which is a topic in much need of discussion.

Market events to watch this week:

Sunday, August 14
7:50pm JPY Prelim GDP q/q
Monday, August 15
9:30pm AUD Monetary Policy Meeting Minutes
Tuesday, August 16
4:30am GBP CPI y/y
5:00am EUR German ZEW Economic Sentiment
5:00am Tentative GBP Inflation Report Hearings
8:30am CAD Manufacturing Sales m/m
8:30am USD Building Permits
8:30am USD CPI m/m
8:30am USD Core CPI m/m
6:45pm NZD Employment Change q/q
Wednesday, August 17
4:30am GBP Average Earnings Index 3m/y
4:30am GBP Claimant Count Change
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Meeting Minutes
9:30pm AUD Employment Change
Thursday, August 18
4:30am GBP Retail Sales m/m
8:30am USD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
Friday, August 19
8:30am CAD Core CPI m/m
8:30am CAD Core Retail Sales m/m

*All times EDT
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