January 09, 2024

“Further signs of robust disinflationary pressures in the US yesterday again bolstered hopes for aggressive rate cuts next year. US CPI and UK GDP later this week loom over markets, as they look to grapple with respective interest rate paths this year.”

Sam Cornford – Head of Trading

Main Headlines

Oil prices experienced a decline of over 3% on Monday, attributed to significant price reductions by Saudi Arabia, the top oil exporter, and an increase in OPEC output. These factors outweighed concerns related to the escalating geopolitical tensions in the Middle East. Brent crude settled down by $2.64, or 3.4%, at $76.12 per barrel, while US West Texas Intermediate crude futures lost $3.04, or 4.1%, settling at $70.77 per barrel. Despite the recent decline, both contracts had previously recorded more than a 2% increase during the first week of 2024 amid heightened geopolitical risks in the Middle East, particularly after attacks by Yemen’s Houthis on ships in the Red Sea.

British retailers reported subdued sales during the Christmas period, as indicated by industry data released on Tuesday. The British Retail Consortium (BRC), representing supermarkets and large stores, revealed that spending in cash terms in December was 1.7% higher than the previous year. However, when adjusted for inflation, this figure translates to a decline in actual purchases. Helen Dickinson, Chief Executive of the BRC, noted that the festive season did not compensate for a challenging year of sluggish retail sales growth, as weak consumer confidence continued to restrain spending.

GBP

Sterling gained modestly against the dollar and the euro in a quiet session yesterday, lifted by broad dollar weakness. As aforementioned, the BRC retail sales this morning showed a real terms fall in festive period spending last month, putting some minor pressure on the pound this morning. Overall, however, there are few domestic impulses in the calendar to move the dial for the UK economic outlook in the early stages of this week – investors will wait for a key speech by Governor Bailey tomorrow and Friday’s GDP read for fresh catalysts to mark out a clear market direction for sterling. Current market pricing expects the Bank of England to lag the ECB this year in terms of rate cuts, with a 75% probability that the first 25bps cut comes in May, compared to a fully priced April cut in the eurozone.

EUR

Poor German industrial output has weighed on the euro this morning, erasing much of the gains made yesterday helped by positive sentiment data. Although still relatively weak, the European Commission’s economic sentiment indicator jumped in December from 94.0 to 96.4 and, for most major sectors except industry, sentiment is now above its long-term average. It is industry that continues to be a major drag to the eurozone economy, however, evidenced again this morning by a 0.7% month-on-month decline in German industrial production that significantly missed consensus estimates for 0.4% growth. Markets expect the euro area unemployment rate to remain around historic lows at 6.5% when it is released later this morning.

USD

The dollar continues its range-bound trading this morning as data uncertainty makes markets hesitant to bet on a clear direction ahead of the CPI release on Thursday. While consumer credit growth picked up in November, the prospect of brisk disinflation and aggressive rate cuts received a boost from the NY Fed’s Survey of Consumer Expectations, where consumer expectations for inflation in one year slumped from 3.4% to 3.0%, denting the dollar with the lowest reading since January 2021. The Federal Reserve view inflation expectations as a significant determinant of overall price pressures, particularly regarding second-round wage effects. Traders are likely to save this week’s big moves for the CPI inflation data in a couple of days, but for this afternoon we have the NFIB Small Business Index, an economic optimism survey, and a speech by the Fed’s Barr to try to make sense of the path for inflation and interest rates.

Markets

Japan’s Nikkei 225 index surged 1.2% yesterday to a post-1990s bubble high, propelled by a jump in tech stocks. Soaring megacap and chip stocks also sent the Nasdaq up 2%, pulled up by a 6.4% gain in Nvidia following the announcement of three new AI-focused graphic processing units. The FTSE 100 lagged behind meanwhile, dragged by flailing oil stocks.

Main Economic Data/Central Banks/Government (All Times CET)

1:00am.: BRC Retail Sales
1:30am.: Australian Retail Sales and Building Approvals
7:45am.: Swiss Unemployment Rate
9:00am.: Swiss Foreign Currency Reserves
11:00am.: Eurozone Unemployment Rate
12:00pm.: US NFIB Small Business Index
2:30pm.: Canadian Building Permits and Trade Balance
2:30pm.: US Trade Balance
6:00pm.: Fed’s Barr Speaks

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