USDJPY TECHS: Bearish Trend Structure

The first few months of the year have historically seen an outsized share of eventual price increases for the year, although that pattern broke down in the early post-pandemic years as firms passed on cost increases at faster than usual rates. January accounted for an average 20% of eventual price rises in each year through 2017-19 (or 40% for Jan & Feb combined). That share plunged to just 3.5% in 2021 (10% for Jan & Feb) but since increased to 16% in 2023 and 17% in 2024 (35% for Jan & Feb). Wednesday’s annual revisions to seasonal adjustment factors could continue to see some normalization here, with the seasonal adjustment process essentially “looking” for larger relative increases this month compared to the past few years, but it’s very hard to know by how much. 

Analysts are mixed on the extent to which “residual seasonality”, whereby the seasonally adjusted data still display a seasonal pattern, will play a role in January: 

• Morgan Stanley: “We found an overall upward bias of 5bp to January core CPI, explained by acceleration in both core goods and services. We are adding that bias in our forecast.”
• Nomura: “We believe positive residual seasonality pushed up core CPI in January this year, but to a lesser extent than last year.”
• Wells Fargo: “We expect some lingering residual seasonality to buoy January’s core reading, but for this dynamic to be less pronounced than last year.
• JPM: “There is some risk that inflation will once again firm to start the year due to residual seasonality, but we think that many of the factors that boosted inflation readings during the first quarter of each of the past two years reflected either idiosyncratic factors or pressures that have since abated to some degree.”
• SocGen: “There is a significant contingent that believes the CPI is prone to seasonal biases favoring higher readings early in the year. However, we remain somewhat unconvinced, and if such a bias exists, revisions may serve to rectify it.”
• Barclays: "In The myth of residual seasonality, we argue that revisions to 2024 estimates will be minor, with little evidence that the strong January inflation prints in recent years can be attributed to residual seasonality.”

Ahead of Wednesday's CPI report, the Dallas Fed has published a helpful primer on how to interpret the various seasonal effects seen in inflation at the start of the year, addressing residual seasonality - and why it should be taken seriously as an indicator of overall inflation pressures (Link here.)

• Their analysis, "Is inflation still slowing? Early 2025 data pivotal to outlook", points to "mildly elevated core PCE inflation in the first quarter of 2025, at around 2.7 percent annualized, as greater persistence in first-quarter inflation is somewhat offset by easing labor market tightness over the past year ... If the labor market remains stable at current conditions and long-run inflation expectations remain anchored, [our] regression would predict more muted inflation readings in the rest of the year and near 2 percent for 2025 as a whole."
• However, the early 2025 inflation readings - including of course this week's January data - could be telling, as their research suggests that Q1 inflation tends to be more sensitive to inflation persistence ("may be driven by a higher likelihood for firms to change prices at the start of the year")  and changes in labor market slack, making it a bellwether for overall inflation pressures: "caution may still be warranted until early 2025 inflation readings are released. The regression underpredicted the first quarter of 2024, and there is uncertainty regarding how much the labor market has actually cooled. The greater sensitivity of first-quarter core PCE inflation to persistence and the state of the business cycle should render those months of data more informative about the underlying momentum of inflation."
• "If it turns out inflation is more persistent than previously thought or overall demand is too elevated for inflation to converge to 2 percent, the results suggest that such concerns would more likely manifest early in the year. Further, the slower monthly pace in the second half of the year is not necessarily as encouraging as similar readings would be early in the year. If instead early 2025 inflation data are subdued, similar to late 2024, 12-month inflation rates would make considerable progress toward the 2 percent goal in only a few months and signal economic conditions likely consistent with price stability."

Same-store retail sales rose 5.3% Y/Y in the week to Feb 8, vs the same week of 2024, per the Johnson Redbook Retail Sales Index, a slight deceleration from 5.7% prior. That left the month-to-date reading (also) up 5.3% Y/Y, vs 4.8% prior. 

• Per the Johnson Redbook report, which anticipates overall February sales to rise 6.3% Y/Y: "Super Bowl Sunday drove sales of snack foods, beverages, team apparel, and related merchandise leading up to the event." They note that February typically has fewer sales/markdowns, "and is typically the month with the lowest sales volume, with the early introduction of spring goods."
• On both measures, discount store retail sales growth (6.4% Y/Y) continues to easily outpace that at department stores.(1.5%), which has consistently been the pattern since the end of 2022.
• The Redbook series have recently tended to show higher Y/Y growth than the monthly Census Bureau retail sales series (and are measuring different things), but overall suggest that nominal retail sales growth continues apace in early 2025.
• January's Census Bureau advance retail sales report is out Friday.