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We saw weak US CPI and retail sales data last Fri, which leaves lingering doubts over the reflation narrative and will place the brakes on how steep the Fed tightening path can be.

  • Mar CPI unexpectedly fell for the 1st time in 13mths, with the headline declining -0.3% m/m while core fell -0.1% m/m (biggest drop since 1982).
  • This mirrored the bigger than expected drop in Mar PPI released last Thurs, which broke it's recent trend of gains and places into doubt the expectation that higher input costs would eventually be passed on to consumers.
  • Add in the fact that Mar retail sales was weak for a 2nd straight mth, validating what we had previously flagged out as a tepid start to 2017 that places downward pressures on Q1 GDP growth.
  • Mar retail sales fell -0.2% m/m as f/c, but with the Feb print downward revised to -0.3% m/m from 0.1% m/m. Core retail sales came in at 0.0% m/m vs a downward revised 0.0% m/m for Feb.
  • The decline in retail sales was led by another drop in auto sales, -1.2% m/m after declining -1.5% m/m in Feb.

We have long highlighted the dichotomy of how soft data (consumer/biz sentiment) had surged post-Trump election but that the hard data had struggled to keep up. Notably, how a strong labour market has failed to generate a sustainable acceleration in wage growth which will eventually serve as a feedback loop dragging on consumer demand.

  • Taking the above into context, the combination of soft consumer demand and a cooling of inflationary pressures validates our long-held viewpoint that the Fed's median 3 hike viewpoint is a tad too optimistic and that 2 remains our expectation.

Bear in mind too President Trump's massive policy flip-flops (of not labelling China a ccy manipulator, now leaving the door open for Fed Chair Yellen to be re-appointed, his preference for a low interest rate policy and how that calls into question the previous notion that he will push hawks into the Fed) and how we still don't know any details of his fiscal/tax plans (which we think will be watered down at best), and we are of the view that market pricing for a Jun Fed hike (currently at 56.7%) will dip ahead.

Note that the US Treasury's currency report bore no teeth, with it saying no nation has met the definition of a ccy manipulator but kept the same 6 countries (China, Germany, Japan, Korea, Switzerland and Taiwan) on it's watch list.

Recall too that Trump jawboned the USD lower last Wed.

Look for all the above to keep USTs well-bid and for the USD to stay on the backfoot in the n/t.


  • 2yr UST yields are poised to push below 1.184% towards it's YTD low 1.130%, with scope for a deeper retracement towards 1.092% and 1.053%.
  • The backend of the curve has already posted fresh YTD lows, and look for further downside ahead.
  • 10yr UST yields are now at 2.237% and on track to test downside of 2.200% and 2.135% (61.8% Fib retracement of 06 Jul 2016 � 15 Dec 2016 up-move). Resistance at 2.338%.
  • 30s currently at 2.892%, and is at risk of a slide towards 2.800-783%. Resistance at 2.948%.

As mentioned last Thurs, the USD Index broke below it's it's uptrend line from the 27 Mar low (then at 100.97) and it's 50-day MA 100.79 which was a tech negative signal.

  • The risk ahead is tilted to a downside test of the 100.00 handle and possibly 99.27 (61.8% Fib retracement of 03 May 2016 � 03 Jan 2017 up-move). JH

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