22 January 2024: Retail sales fell in December


  • Can the UK achieve a soft landing?
  • Too early for the FOMC to consider rate cuts
  • Bloomberg survey sees rate cuts beginning in June
GBP – Market Commentary

This week’s activity data may see the seeds of green shoots for recovery

It may be little more than pre-election hype, but there is a growing feeling that the UK economy could achieve a soft landing in the coming months.

This would be a far cry from the fears of a deep and long-lasting recession which gripped the market as the Bank of England appeared to be stuck on a “treadmill” of twenty-five basis point interest rate hikes that appeared to be never-ending as inflation remained stubbornly high.

There is no definitive agreement on what constitutes a soft landing, particularly since it is a rare occurrence in the global economy while in the UK, particularly post-war, it has never happened.

When considering the UK economy, a soft landing would typically be considered should the rate of unemployment fall to and remain below its long-term average while consumer prices are at, or close to, the Government’s two per cent target.

The Labour Party will dread such an event because although the Government cannot claim to have been instrumental in the fall in headline inflation in recent months, the Prime Minister promised that inflation would be halved during his first year in office, a goal that has been easily achieved.

There was even a ready excuse for the fall in retail sales in December. The run-up to Christmas is traditionally one of the stronger periods for consumer activity.

Retail sales activity in December fell by 2.4% compared with a year earlier and by 3.2% month-on-month. When fuel is not included, the month-on-month figure is even worse, falling by 3.3%.

The data drew excuses that consumers saw opportunities to “shop early for Christmas” with retailers lowering prices earlier than normal, while “Black Friday” sales are gaining more traction every year.

The fact remains that there were no particular redeeming features in the data. Consumer confidence will be one area that needs significant work if the Conservative Party is to pull off a victory whenever the election is called.

The Government has carefully nurtured the general air of positivity and is a clear part of their election strategy. The Chancellor of the Exchequer made a two-fold attempt in his speech at Davos last week at the World Economic Forum.

Firstly, Jeremy Hunt made a compelling case for an increase in inward investment into the UK, particularly in the tech sector. He then hinted about rate cuts in each of what he believes will be two budgets he will deliver during 2024.

Last week, the pound stayed in the relatively narrow range that has been in place since the turn of the year, whose boundaries are between 1.2620 and 1.2760. Although it tested the lower end of that range last week, falling to a low of 1.2596, it recovered strongly to close at 1.2702.

USD – Market Commentary

U.S. economy could go either way in the coming months

There has been “will it or won’t it” speculation about whether the Fed will declare a soft landing for the U.S. economy at the next regular meeting of the FOMC, which takes place next week.

This is such a rare event, that the market is not even sure about who it falls to to make the declaration. It will need to be someone or something, that doesn’t have a vested interest in the state of the economy, like the Treasury Secretary or the President.

While everyone is likely to look in Jerome Powell’s direction, he may not feel confident to make such a confident statement, given the fact that he is still smarting two and a half years after declaring that rising inflation was “transitory”.

The market is tiring of talk about a soft landing, even if the economy is performing at a level few expected at the height of the Fed’s rate-hike cycle.

Nevertheless, the point of no return is fast approaching when the FOMC will face having to decide on when to cut rates.

That decision will have to be in tandem with a declaration that inflation has been defeated, even if it hasn’t yet reached the Fed’s two per cent target.

Powell would undo a great deal of goodwill that the market feels towards him and his colleagues on the FOMC were rates to be cut and inflation to begin to rise.

Equally, the market is, and has for some time, been expecting a major fall in the number of new jobs that are created monthly.

The headline NFP data is still defying gravity.

In December, the 216k new jobs created were still above the average for the entire year, while the employment rate remains well below what is considered full employment.

The second of this year’s Primaries will take place in New Hampshire tomorrow.

Following former President Trump’s victory in the first, which was held in Iowa last week, his closest challenger, Rick de Santis, has not only pulled out of the race but declared his support for Trump.

It would appear that only Trump’s ongoing legal battles can derail his attempt to become only the second President to return to the White House after a gap of four years.

The dollar index continues to threaten to break through the stubborn resistance that is set around the 104 level but continually appears to lack momentum.

Last week it climbed to a high of 103.69 but fell back to close at 103.25.

EUR – Market Commentary

Labour, energy and digital tech need major updates

The German Economy Minister, Christian Lindner, joined the great and the good of world economic opinion in Davos last week and declared that his country is not the “sick man of Europe” as many have affirmed, given the significant fall in both output and GDP over the past eighteen months, but merely the “tired man of Europe.

After dealing with the successive crises that have taken place since 2012, Lindner likened the German economy to a person who is still tired after a long night and a short sleep.

He feels that the low growth, possibly even stagnation the country is experiencing is a wake-up call and the economy needs a “strong cup of coffee” in the shape of some structural reform, to strengthen the supply side of the economy, most likely in the areas of labour, energy and digital technology.

Economists at Deutsche Bank believe that the German economy will continue to suffer, particularly in the first three months of this year, then flatline for the rest of 2024. They predict a 0.2% decline in GDP this year, compared to growth of 0.2% for the Eurozone over the same period.

Lindner has faced severe criticism from the agricultural sector recently over cuts to farm fuel subsidies and has faced opposition from his colleagues at Ecofin over his refusal to raise taxes to fund green initiatives.

He believes that funding green initiatives in Africa would reap far greater benefits than taxing German steel makers who are already struggling due to the tough environment that is created by the Chinese industry.

Also in Davos last week, ECB president Christine Lagarde refused to be drawn on when the ECB will begin to cut interest rates. There was speculation about whether rates will be cut at all in 2024, following comments from her fellow Governing Council member Robert Holzmann, the Austrian Central Bank Governor.

The next meeting of the rate-setting committee will take place this week, and rates will certainly remain on hold.

The market’s best guess now is for the first cut to take place in June, but a lot will depend on wages and inflation data for that to happen.

The ECB appears to have abandoned any fears it held about a recession in the region, as it is still worried about inflation reigniting should rates be cut prematurely.

The Euro is in the doldrums as the market concentrates on which will be the first G7 Central Bank to cut rates.

The common currency fell to a low of 1.0844 last week and closed at 1.0895.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.