January 18, 2024

“Robust consumer spending in the US, hawkish policymakers, and underwhelming Chinese economic data are strong headwinds for sterling and the euro. A hot UK CPI print has sparked a recovery for the pound but it will face a new test in the form of potentially poor retail sales data tomorrow morning.”

Tim Hallinan – Trading Director

Main Headlines

CEOs of banks, gathering in private at the World Economic Forum on Wednesday, expressed concerns about the competitive threats posed by fintech firms and private lenders as well as mounting regulation. In the Davos meeting attended by numerous CEOs, including JPMorgan’s Jamie Dimon, executives delved into discussions on the challenging global economic landscape, taking into account shifting interest rate policies and rising debt.

According to the Office for National Statistics (ONS), British house prices experienced the most significant decline in more than 12 years in November, dropping by 2.1% compared to the same month in 2022. The data showed that London saw the largest annual decrease, with prices falling by 6.0%. However, other measures of the UK housing market have indicated signs of stabilisation in recent weeks, as some indicators of house prices increased amid rising demand after mortgage rates appeared to have peaked.

GBP

A CPI-induced surge has lifted sterling by 0.8% since yesterday morning’s unexpected uptick in consumer price growth. The bump in the road for the Bank of England prompted a trimming in rate cut expectations that pushed two 2-year gilt yield – a reflection of the expected average policy rate over the period – up by 20bps to the highest level in a month at 4.36%, having dipped below the 4% mark in late December. Markets will look for an insight into British lending and the restrictiveness of financial conditions this morning in the quarterly BoE Credit Conditions Survey, although this is unlikely to move the dial too greatly for sterling. Instead, consumer spending is the next key domestic impulse with retail sales tomorrow, which is expected to have contracted by 0.5% in December, mirroring the gloom reported by some retailers about festive spending, despite some relatively upbeat recent economic indicators that have pointed to a rebound in activity.

EUR

The euro has nursed losses this week as hawkish central bankers and economic gloom in China have chipped away at investor risk sentiment. A lack of macroeconomic data out of the eurozone today will again put the focus on policymaker rhetoric, and in particular ECB President Christine Lagarde, who has been signalling a summer first cut versus the April expected by markets. In her latest comments, she highlighted that aggressive rate cut bets are not helpful for the battle against inflation, with them ironically one of the biggest risks to near-term cuts. She speaks again on the European markets later today, after markets have scoured the ECB meeting minutes from last month this afternoon, which should give further insight into any potential discussions about rate cuts and their likely timing this year.

USD

The dollar again notched a fresh one-month high last night, this time on the back of unexpectedly strong retail sales data that signalled continuing resilience of the US consumer. In yet further robust data this month, retail sales beat the 0.4% consensus to grow 0.6% in December. Consumer spending accounts for around 70% of US GDP, so this will likely give a boost to expectations for Q4 GDP growth when it lands next week. The broad risk off mood continued yesterday as Chinese data underwhelmed and policymakers pushed back against cut expectations, driving up US yields as the probability for a March cut was pushed down to 60%. Unemployment claims data this afternoon will provide a renewed look at inflationary pressures stemming from imbalances in the labour market, while building permits data should give an insight into the health of the property sector.

Markets

Stocks faced a decline, and bond yields rose amid speculation that the Federal Reserve might not rush to cut interest rates as signs of economic resilience emerged. All Wall St equity indices ended the session lower yesterday as European and Asian shares dwindled on pared back rate cut hopes and concerns about the Chinese economy.

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

1:30am.: Australian Employment Change
10:00am.: Euro Area Current Account
10:30am.: BoE Credit Conditions Survey
10:30am: SNB Chairman Jordan speaks
1:30pm.: ECB Monetary Policy Meeting Accounts
2:30pm.: US Unemployment Claims and Building Permits
4:15pm.: ECB President Lagarde speaks

Corporate Events

Earnings include Costco and Northern Trust

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