February 15, 2024

“Data this morning confirmed a technical recession in the UK but, with some positive signs emerging recently, sterling has resisted a strong weakening. Consumer spending is the focus for investors as we head towards the end of the week as the rate cut guessing game continues to drive the rates markets.”

Sam Cornford – Head of Trading

Main Headlines

Japan unexpectedly entered a recession at the end of last year, conceding its position as the world’s third-largest economy to Germany due to sluggish domestic demand. This unexpected downturn raises questions about the Bank of Japan’s prediction that increasing wages would support consumer spending and maintain inflation around its 2% target.

Britain’s opposition Labour Party is projected to achieve a landslide victory in the upcoming national election later this year, surpassing Tony Blair’s win in 1997, according to a published projection on Wednesday. The poll, conducted between Jan. 24 and Feb. 12 and reported in the Mirror newspaper, indicates Labour leading with 42% of the vote, while Prime Minister Rishi Sunak’s Conservatives trail at 22%. The recent announcement of the UK’s entry into a technical recession in Q4 will likely exacerbate Sunak’s election challenges.

GBP

Sterling’s poor data week was exacerbated again this morning as GDP data confirmed a deeper-than-expected economic contraction of -0.3% in Q4. But the technical recession headline should matter less for the Bank of England and more for Sunak’s election troubles in a year currently set for a heavy Labour victory. Policymakers at the central bank have repeatedly mentioned that, barring any significant downturn, which side of 0% the stagnating British economy falls has little relevance for rate decisions, particularly with an uptick in the timelier PMI data pointing to improved economic prospects early this year. Ultimately these contextual factors – plus a better-than-expected December figure – have limited the downwards move to 0.2% this morning, although the cumulative impact of the data this week now have sterling trading around 1% weaker than its peak on Monday morning. Retail sales provide the final piece of the economic puzzle tomorrow morning and should attract a lot of attention given December’s 3.2% contraction – consensus pencils in a 1.5% recovery.

EUR

The euro crept higher against the dollar mostly unperturbed through yesterday’s quiet session as it retraced its sharp US CPI-induced move downwards the previous day. A slump in sterling, meanwhile, has dragged GBP/EUR 0.6% lower from the near six-month highs notched on Wednesday morning. A surprise 2.6% expansion in industrial production in December was the only release of note yesterday, but the details of the report revealed that an anomalous 23.5% increase in Irish production was masking still poor economic momentum across the bloc. Big events in the UK and US will keep euro investors on their toes for now, but a renewed domestic impulse will likely have to wait for next week’s PMI data.

USD

The dollar is trading slightly weaker this morning, having consolidated gains from Tuesday’s hot CPI inflation print. A solid stream of resilient US economic data continues to see the greenback tracking rallying US rates – the 2-year Treasury yield has surged almost 35bps this month, on the back of exceptionally strong jobs numbers and a spike in core inflation. The resulting recalibration of the Fed’s rate cutting path has pushed market expectations closer and closer to the forecasts pencilled in by policymakers themselves in December, which at the time prompted markets to price in twice as many as the 75bps etched in the projections. Today’s retail sales data are expected to provide a counterpoint to the strong numbers, however, with a 0.2% decrease in retail consumption in January. However, the consensus has underestimated this index each of the last six times, and we may see yet further resilience in the US consumer.

Market

The Wall Street stock indices sharply recovered yesterday from the post-CPI dip on Tuesday, lifted by AI poster-boy Nvidia and ride-hailing apps Lyft and Uber. A surge in Nvidia stock put it above Alphabet as the third-largest US company behind Microsoft and Apple, sending Asian tech stocks surging across the continent too.

Main Economic Events (All Times CET)

1:30am: Australian Unemployment Rate
8:00am: UK GDP
9:00am: ECB President Lagarde speaks
2:30pm: US Retail Sales and Unemployment Claims
3:15pm: US Industrial Production
7:15pm: Fed’s Waller speaks

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