Trump Speculations Drive Dollar Drop, Gold Hits One-Month High (20-24 Jan)

The dollar index fell 0.8%, snapping a six-week winning streak, despite strong U.S. economic data.

Slower core inflation, weaker PPI, and retail sales fueled hopes for Fed rate cuts. Markets are pricing in 43 basis points of cuts this year. The euro gained, aided by a weaker dollar, strong German inflation, and hawkish ECB comments.

Gold rose to a one-month high, its third weekly gain, as weak U.S. data boosted hopes for Fed cuts. Inflation fears and potential Trump tariffs also supported gold. Silver gained, with China's data set to influence future trends.

U.S. 10-year yields eased to 4.60%. Japanese 10-year yields hit a 14-year high at 1.26%. Chinese 10-year yields tried to recover from historic lows near 1.65%.

U.S. PPI (MoM) (Dec)

Factory gate prices rose 0.2% in December, down from 0.4% in November, below the 0.3% forecast. Goods prices increased 0.6%, driven by a 9.7% surge in gasoline. Services prices were flat as gains in transportation offset declines in other sectors. Annual producer inflation rose to 3.3%, the highest since February 2023, but below the expected 3.4%. Core PPI stayed unchanged month-over-month at 0.2%, with the annual rate at 3.5%, below the 3.8% forecast.

U.S. CPI (YoY) (Dec)

Annual inflation rose to 2.9% in December from 2.7% in November, matching expectations. Energy costs fell less sharply (-0.5%), with smaller declines in gasoline (-3.4%) and fuel oil (-13.1%). Food inflation rose to 2.5%, while shelter costs slowed to 4.6%. Monthly CPI increased 0.4%, driven by a 2.6% rise in energy and a 0.3% increase in food and shelter.

U.K. CPI (YoY) (Dec)

UK inflation eased to 2.5% in December from 2.6%, below forecasts. Prices slowed for restaurants, recreation, and services, while food inflation held steady. Transport costs fell less sharply, as higher motor fuel prices offset a 26% drop in airfares. Monthly CPI rose 0.3%, below the 0.4% estimate. Core inflation fell to 3.2%, with monthly growth at 0.3%.

GDP (MoM) (Nov)

The UK economy stagnated in Q3 2024, with growth revised to 0% from 0.1%. Services showed no growth, while production fell 0.4%, led by a 2% drop in utilities. Construction grew 0.7%. Exports and imports fell, improving net trade. Household spending rose 0.5%, and business investment increased 1.9%. Government consumption rose just 0.1%, while gross capital formation fell 0.6%.

German CPI (MoM) (Dec)

Germany's inflation rose to 2.6% in December, the highest since January, driven by faster price increases in services (4.1%) and food (2%). Energy prices declined less (-1.6%). Monthly CPI increased 0.5%, recovering from a 0.2% drop, with harmonized prices rising 0.7%. Core inflation for 2024 was 3%, down from 5.1% in 2023.

Retail Sales (MoM) (Dec)

U.S. retail sales rose 0.4% in December, the smallest gain in four months, below the 0.6% forecast. Gains were led by miscellaneous retailers (4.3%), sporting goods (2.6%), and furniture (2.3%). Sales fell in building materials (-2%) and food services (-0.3%). Core sales, excluding autos, food, and gas, rose 0.7%, the highest in three months.

Initial Jobless Claims

U.S. initial jobless claims rose by 14,000 to 217,000 for the week ending January 11, exceeding the 210,000 forecast. Continuing claims fell to 1,859,000, extending their decline from November highs. The four-week moving average decreased slightly to 212,750, while non-seasonally adjusted claims rose by 45,228, driven by increases in California, Michigan, and Texas.

China GDP (YoY) (Q4)

China’s GDP grew 5.4% in Q4, the highest in 18 months, surpassing the 5% forecast. Growth was supported by stimulus measures, with industrial output at an 8-month high and retail sales rebounding. Exports surged to a 3-year high, while imports hit a 27-month high. For 2024, GDP grew 5%, meeting Beijing’s target but below 2023’s 5.2%. Fixed investment rose 3.2%.

Eurozone CPI (YoY) (Dec)

Eurozone inflation rose to 2.4% in December 2024, the highest since July, up from 2.2% in November, matching expectations. Energy costs turned positive (0.1% vs. -2%), and services inflation edged up (4% vs. 3.9%).

Food inflation slowed as unprocessed food prices decelerated (1.6% vs. 2.3%), offsetting a rise in processed food, alcohol, and tobacco (2.9% vs. 2.8%). Inflation increased in Germany (2.8% vs. 2.4%) and France (1.8% vs. 1.7%) but eased in Italy (1.4% vs. 1.5%). Core inflation stayed at 2.7%. The ECB expects inflation to hit its 2% target by year-end.

Currencies

The dollar index declined by 0.8% this week, ending a six-week winning streak. Strong U.S. economic data highlights economic resilience, but slower core inflation, weaker PPI, and retail sales fueled expectations of Federal Reserve rate cuts. Markets are pricing in 43 basis points of cuts for 2024. Despite this, the dollar remains near November 2022 highs, with attention turning to policy changes under the Trump administration.

The euro rose against the dollar, supported by a weaker dollar index and German inflation exceeding forecasts in December. European inflation aligned with expectations, while hawkish European Central Bank comments added further support.

The British pound weakened to its lowest level since late 2023 against the dollar. Retail sales fell 0.3% in December, missing the forecasted 0.4% rise and reversing November's gains. GDP growth was 0.1% in November, below expectations, with three-month growth stagnating. December inflation dropped to 2.5%, matching the Bank of England’s forecast but below market expectations of 2.6%. Money markets now anticipate three rate cuts by the BoE in 2024.

The Japanese yen had its strongest performance against the dollar since late November. Speculation about a Bank of Japan rate hike increased, driven by robust inflation and wage growth data. BOJ officials hinted at policy tightening, while Japan’s Finance Minister emphasized readiness to support the yen, further boosting its strength.

The Canadian dollar weakened past 1.44 per USD, nearing its January 2016 low of 1.445. Diverging monetary policies, with expected Bank of Canada rate cuts contrasting the Fed’s hawkish stance, widened the US-Canada yield gap. A 13.35% drop in December housing starts signaled domestic weakness, while lower oil prices and fears of U.S. tariffs under the Trump administration added further pressure.

Commodities

Gold ended the week near a one-month high, marking its third consecutive weekly gain. Weaker U.S. core inflation and disappointing retail sales have raised expectations for multiple Federal Reserve rate cuts in 2024. Fed Governor Christopher Waller suggested the possibility of three to four rate cuts if data weakens further, boosting non-interest-bearing gold's appeal. Concerns over potential Trump-era tariffs, which could elevate inflation, also supported gold as an inflation hedge. A ceasefire between Israel and Hamas reduced demand for safe-haven assets. Gold gained about 1% this week.

Silver also recorded its third weekly gain, driven by similar factors. However, its performance this year is expected to be significantly influenced by economic data and policy developments in China.

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