Better Than Expected Retail Sales Print In US Eroded Bets Of Rate Cut In Mar’24

UK's inflation came in higher than expected at 4% (3.9% in Nov'23) led by higher prices of alcohol and tobacco, which in turn has dented rate cut expectations from BoE

Jahnavi Prabhakar,

Economist,

Bank of Baroda 

Mumbai, January 18, 2024: Withering the dual storm of restrictive monetary policy and inflation, US retail sales data climbed higher than expected and signaled strength in the economy. The pick-up (0.6% from 0.5% in Nov’23) was boosted by higher motor vehicle and online purchases. This reports further underscores the probability of rate cut with investors pricing in a 53.8% chance of cut in Mar’24 from 63.1% earlier. Hawkish commentary by ECB officials also lowered the expectations of easing of global rates. Soft economic data from China which pointed towards patchy recovery also weighed on investor sentiments. Separately, UK’s inflation came in higher than expected at 4% (3.9% in Nov’23) led by higher prices of alcohol and tobacco, which in turn has dented rate cut expectations from BoE.

• Global indices ended lower as investors pared back on the rate cut expectations and monitored economic outlook for China. Better than expected retail sales print in US also eroded bets of rate cut in Mar’24. Led by subdued global cues, Sensex too dropped registering the sharpest fall in over 19-months with deep losses in banking and metal stocks. It is trading further lower today in line with other Asian stocks.
• Asian currencies ended lower, while GBP and EUR gained. DXY was up by 0.1%, supported by rising US treasury yields and better than expected macro data. JPY fell the most (-0.7%), owing to widening US-Japan interest rate differential. INR was down by 0.1%, even as oil prices fell. It is trading broadly steady today, while other Asian currencies are trading higher.
• Except China, other global yields closed higher. UK’s 10Y yield rose the most. Higher than expected CPI print in the UK has revived concerns around timing   of BoE’s rate cuts. ECB chief’s warning that inflation may again intensify and healthier than expected macro data from the US, also played on investor sentiments. India’s 10Y yield rose by 2bps, and is trading flat today.

(The views expressed in this research note are personal views of the author(s) and do not necessarily reflect the views of Bank of Baroda. Nothing contained in this publication shall constitute or be deemed to constitute an offer to sell/ purchase or as an invitation or solicitation to do so for any securities of any entity.)