January 19, 2024

“A shock disappointment for British consumer spending in December has weighed on sterling this morning but, on balance, the economic outlook still looks to improve on the Bank of England’s projections this quarter. Meanwhile in the US, evidence continues to mount against the March cut expected by markets, after unemployment claims unexpectedly fell yesterday afternoon.”

Sam Cornford – Head of Trading

Main Headlines

The US House of Representatives has approved a stopgap bill to fund the federal government through early March, aiming to avoid a partial government shutdown. The measure, which passed 314-108, had previously been approved by the Senate with a 77-18 vote. The bill now awaits President Joe Biden’s final approval.

Google has announced plans to invest $1 billion in building a data centre near London. The data centre will be located in Waltham Cross, about 15 miles north of central London, on a 33-acre site purchased by Google in 2020. This investment reflects Google’s commitment to meeting the growing demand for internet services in the region. The move has been welcomed by the British government, which sees it as a significant vote of confidence in the UK and its efforts to attract investment in key industries such as technology and artificial intelligence.

GBP

A slump in retail sales in December has bruised sterling this morning, after volumes contracted 3.2% month-on-month in the worst print since January 2021. The economist consensus had looked for a more moderate 0.5% fall, and the data will add to growing concerns that the British economy could notch a technical recession if activity contracts again in Q4, which would have large political implications for PM Sunak ahead of a likely election this year. But there are still reasons to be optimistic – it is likely that the seasonal adjustment process warped the figure, given that more festive shopping was brought forward to the Black Friday sales, and the real wage growth and upbeat PMI data for December signal a much better outlook than this release suggests in isolation. The move in the pound has been limited to a 0.2% drop as a result, as traders only modestly increase their expectations for Bank of England cuts. Fresh triggers for sterling price action are likely to come from elsewhere today, as traders await the January PMIs next Wednesday on the domestic side.

EUR

The euro has held broadly stable in the second half of the week, hovering above a five-week low against the dollar after slipping on Tuesday. With the ECB’s January policy decision next Thursday coming into view, the minutes from December’s meeting released yesterday steered clear of any open discussion of rate cuts, but did acknowledge the pace of disinflation and pointed out that the central bank’s economic projections are likely too optimistic. Amid all of the policymaker pushback against market expectations for rate cuts this week, it is easy to argue that they have become relatively more dovish in the past month, given that have moved from being unwilling to even discuss cuts to open reference this week around potential summer easing. ECB President Lagarde will talk on the topic in Davos again this morning.

USD

A robust unemployment claims figure added to the mounting evidence that the US economy is proving to be more resilient than expected this month, although this gave the dollar only a brief boost yesterday. The labour market is showing few signs of the necessary capitulation that would tempt the Fed to cut as soon as March, with the fewest people in almost a year filing unemployment claims last week. The markets are unwilling to budge, however, having only clipped the probability for a Q1 cut from 75% to 55% this week, despite noble attempts from policymakers. If the central bankers are indeed correct about a mere 75bps of cuts this year, the markets will have to rapidly adapt their pricing this year, likely giving support to the dollar. The highlight for today’s macroeconomic diary is the preliminary University of Michigan consumer sentiment survey for January, which is likely to be buoyed by the prospect of easing financial conditions this year.

Markets

Stocks in Europe are finishing the week on a positive note, with the Stoxx Europe 600 index gaining for a second day after a previous selloff triggered by diminishing hopes for early interest rate cuts. The FTSE 100 is rising on hopes that a slightly poorer economic outlook will prompt the Bank of England to cut rates sooner.

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

8:00am.: UK Retail Sales
8:30am.: Swiss PPI
11:00am.: ECB President Lagarde Speaks
2:30pm.: Canadian Retail Sales
4:00pm.: US Prelim UoM Consumer Sentiment
10:15pm.: Fed’s Daly speaks

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