• Spending picks up in April
  • Soft core inflation
  • Evans sees strong economy
  • EUR so resilient

Good morning,

US retail sales increased in April, adding to the argument that the slowdown in Q1 was temporary. The April reading took March with it, improving a -.2% decline in to positive territory at 0.1%. April’s 0.4% gain from a month before was below consensus expectations, but the upward revision for March is helping investors take this in stride. Gains were led by a rebound in motor vehicle sales, and 9 out of 13 major retail categories showed improvement. Not included in the upswing: clothing, furniture, food and beverages, and general merchandise stores which all saw sales fall.

CPI inflation was broadly in line with expectations, but there may be cause for concern beneath the surface. Core inflation, which discounts the more volatile components of the overall print, has missed consensus expectations for two months in a row now. At 1.9%, the core reading is also at its lowest print since October 2015. Investors are not thinking that the miss is enough to derail the Fed from hiking interest rates later this year. The details: core goods prices dragged on the print, falling -0.2% from a month prior and -0.6% annually, but services picked up 0.1% from a drop in March.

A slower pickup in inflation doesn’t appear to have ruffled any feathers at the Fed. Charles Evans, a voting member of the Fed, spoke in Dublin early Friday. Evans detailed his thoughts on the balance sheet reduction, but more importantly he downplayed inflation running below the Fed’s target as the overall economy is doing well. Evans also mentioned that unemployment was down to 4.4% which was “really very good.” While this hasn’t been a significant mover in currency markets, Evans is a voting member at the FOMC and we are closely following all Fed speak to gauge expectations for the Fed’s pace of interest rate hikes.

The greenback slipped on the miss in CPI and retail sales, with the DXY dollar index falling over 0.4%. The euro and pound are noticeably higher against the USD, with the euro climbing above 1.09. Japanese yen also taking into the low 113s. A preliminary reading of Michigan consumer sentiment was unable to bring the dollar back into the green despite coming in higher than consensus as the hard data takes center stage. Solid sentiment was sidestepped by a decline in inflation expectations for the five to ten years out.

EURUSD: Euro climbing to be one of the top benefactors of a weaker dollar.

GBPUSD: Sterling gains led by the miss in US inflation and retail sales readings.

AUDUSD: Aussie dollar slightly higher against the greenback, but the USD clawed back losses following lower CPI and retail sales.

USDCAD: CAD gave up knee-jerk gains from US data misses to sit flat against the greenback.

USDJPY: US data misses helped support the yen’s move higher this morning, extending gains into the low 113s.