ON DECK FOR WEDNESDAY, FEBRUARY 17
KEY POINTS:
- Mild risk-off sentiment across global asset classes
- CDN core CPI still stuck around 1½%
- Fed minutes could sound a touch stale
- There was more to strong US retail sales than stimulus cheques
- US manufacturers propel industrial output higher
INTERNATIONAL
A slight risk-off tone is being applied across global asset classes. Stocks range from flat S&P futures to a ¾% in Germany. After the US 10s yield spiked higher by about 10bps since Friday it is down about 2bps this morning. Europe’s curves are little changed. The USD is broadly stronger with yen and CAD outperforming others. Oil is up by just over 1%.
- Sovereign debt curves are bull flattening while retaining much of yesterday’s rates sell-off. The US 10 year yield is down 4bps and Canada’s 10s are underperforming with a rally of about half that. Gilts are also outperforming as the 10s yield drops 5bps.
- Oil is up a few dimes but lower than earlier this morning on volatile headlines around OPEC+ production plans. Gold is off 1%.
- Equities are losing ground with the S&P down by about ½%, the TSX down by ¾% and European markets off by up to 1.1% in Germany.
- The USD is generally stronger so far, though little changed to CAD and the Mexican peso and slightly weaker to the yen.
Sterling largely ignored UK inflation this morning. Core CPI held firm in January at 1.4% y/y (consensus 1.3%) while headline ticked higher to 0.7% (0.6% prior and consensus).
UNITED STATES
US retail sales strongly beat expectations, but the potential drivers were much more complicated than simply pointing to stimulus cheques (recap here).
US industrial output was up 0.9% m/m in January which was another solid beat (consensus 0.4%) with some of that explained by the downward revision to the prior month’s 1.6% m/m rise (now 1.3%). Manufacturing output was up 1.0%.
As for FOMC minutes (2pmET), the overall tone should reinforce the improved optimism over the December and January meetings, but the minutes are likely to be stale. The scale and scope of US fiscal stimulus would have been further informed since then and vaccine developments have been more constructive. I’m not sure that nonfarm payrolls would have changed much by way of Fed thinking as most of the disappointment came through revisions to December and they are focused upon the medium-term. The minutes are likely to emphasize that the Fed will be patient and that it is premature to talk tapering. One risk is discussion around ‘substantial’ improvement in dual mandate as discussed in the Global Week Ahead.
CANADA
Canadian core CPI inflation climbed a tick to 1.5% y/y using the average of the three central tendency measures but remains range-bound around 1½% y/y for about the past five months (chart 1).
Still, while the combination of strong US retail sales and soft Canadian core inflation drove the Canadian dollar to slightly depreciate at first, this effect was subsequently unwound and the overall readings should have no bearing on the Bank of Canada that can’t do anything about backward inflation and has continued cause to look ahead to strong growth and upside risk to inflation.
Chart 2 breaks down the core measures to show their widened dispersion of late.
Charts 3 and 4 provide weighted contributions to overall inflation on a year-over-year basis (chart 3) and month-over-month basis (chart 4) in order to depict what categories drove the report. Unweighted changes in prices within the CPI basket are shown in charts 5 and 6.
Finally, chart 7 breaks down what was included and what was excluded from the trimmed mean CPI measure that trims out the top 20% of prices and the bottom 20% of prices.
Canadian CPI, m/m / y/y %, January:
Actual: 0.6 / 1.0
Scotia: 0.3 / 0.8
Consensus: 0.5 / 0.9
Prior: -0.2 / 0.7
Canadian core CPI, y/y % change, January:
Average: 1.5 (prior 0.7%)
Weighted median: 1.4 (prior (1.3%)
Common component: 1.3 (prior 1.3%)
Trimmed mean: 1.8 (prior 1.6%)
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