January 17, 2024

“Gloomy economic data in China has cast a shadow over markets today as safe-haven flows propel the dollar and the futures markets point to a drop in equities. Meanwhile, the unexpected move higher in UK CPI in December has prompted markets to trim rate cut expectations and boosted sterling this morning.”

Sam Cornford – Head of Trading

Main Headlines

China’s economy expanded by 5.2% in 2023, slightly exceeding the official target. Yet the recovery faced challenges, and the economic outlook for the year remained uncertain. A deepening property crisis, rising deflationary risks, and subdued demand contributed to a less robust recovery than anticipated, with growth momentum slowing considerably in the fourth quarter. Weak consumer and business confidence, increasing local government debts, and a slowdown in global growth negatively impacted jobs, economic activity, and investment in the world’s second-largest economy.

London was deemed unprepared for the anticipated heatwaves, floods, and rising sea levels in the coming years by a report commissioned by Mayor Sadiq Khan. The report, prompted by recent instances of high temperatures, wildfires, and floods, emphasises the necessity for a significant shift in planning and investment. Recommendations include reinforcing flood defences along the River Thames and enhancing housing standards to address the challenges posed by climate change.

GBP

Sterling has climbed this morning after sustained inflationary pressures prompted markets to trim expectations for Bank of England rate cuts this year. While the economist consensus sought a further modest cooling to 3.8%, increases in alcohol and tobacco duty nudged the figure up to 4.0% from November’s 3.9% print. Importantly, the stall in disinflation was reflected in the underlying trend – the core measure that excludes volatile components remained steady at 5.1%. This data again adds to the case to ease the market’s aggressive expectations for rate cuts this year, as inflation proves to be far stickier than would be expected in the almost perfect disinflationary scenario in the money markets that has pencilled in five 25bps rate cuts in 2024. The pound’s rise was dampened, however, by a dip earlier this morning driven by the general risk-off backdrop in the financial markets amid hawkish central banker rhetoric and disappointing Chinese economic data.

EUR

The euro has consolidated around a one-month low as dampened rate cut expectations and feeble Chinese data weigh on risk appetite. China’s fading economic momentum in the fourth quarter painted a picture of a weak growth environment and ultimately weak foreign demand for the eurozone, whose economic fortunes are closely tied to those of China. ECB policymakers continue to push back against market pricing for rate cuts, although France’s Villeroy and President Lagarde have given more moderate views recently, with both expecting rate cuts this year – Lagarde pointed to the summer this morning – but neither willing to declare victory at this stage. Markets have increasingly become more attentive to policymakers’ rhetoric this week, and many suspect that there is much further to go in pulling back on the five or six rate cuts expected to begin in spring. Lagarde speaks again in Davos today and the final estimate of eurozone CPI lands later this morning.

USD

A speech by the Fed’s Waller provided a renewed impulse for markets to pare back rate cut bets yesterday evening, propelling the dollar to a fresh one-month high overnight. Waller’s speech gave some mixed signals, but it was traded as hawkish and ultimately gave the dollar another leg up. On the one hand, he pointed out that current disinflationary momentum in the 3-month and 6-month annualised measures of core PCE inflation were already at or around the 2% target. Yet at the same time, he proposed a ‘slow and methodical’ rate cutting cycle that would ultimately tighten policy in terms of real yields at a time when it will become increasingly unnecessary. His argument boiled down to the idea that a resilient US economy afforded the Fed the opportunity to dither and to wait to be certain of the path of inflation, rather than attempt to navigate a quicker soft landing, something consistent with the 75bps of cuts expected by policymakers. More and more, the data seems to point at an easing cycle somewhere in between the Fed’s and the market’s expectations and at neither extreme. More Fed speakers come today with Barr and Williams, alongside economic activity data that could spur some volatility this afternoon when retail sales and industrial production figures are released.

Markets

The gloomy mood spreading from China and hawkish central banker rhetoric have European equity futures set for a sharply lower open, with luxury stocks particularly at risk. Asian stocks tumbled to a one-month low and Chinese blue chips hovered around their lowest in five years.

Main Economic Events (All Times CET)

3:00am.: Chinese GDP, Retail Sales, & Industrial Production
8:00am.: UK CPI
10:30am.: UK House Price Index
11:00am.: Eurozone Final CPI
2:30pm.: US Retail Sales
3:00pm.: Fed’s Barr speaks
3:15pm.: US Industrial Production
4:15pm.: ECB President Lagarde speaks

Corporate Events

Earnings include Charles Schwab and Prologis

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