Crumbling foundation

This morning, the juxtaposition of faltering UK economic performance and the positivity following a Tory majority heading into EU trade negotiations paints a stark contrast. Since the economic fundamentals have been poor but not disastrous over the past year—probably because the consumer is in a relatively good place—markets focused squarely on the lack of political progress in the protracted Brexit saga. Boris Johnson’s resounding victory in the latest elections has at last provided political momentum, but the underlying economic deterioration seems to be outpacing events. 

If we took a 30,000 feet tour of the UK economy, we’d note that UK Gross Domestic Product growth in the second half of 2019 was about 0.4%, but Q4 alone was -0.2%. In fact, if we viewed the last six months (Aug – Jan), the cumulative GDP growth has been a decline of 0.2%, which means the UK might already be in recession. Purchasing Managers’ Index survey data—forward-looking indicators of sectoral business outlook—have also registered the decline. Construction and Manufacturing PMI’s have signalled contraction since March and May 2019, respectively. The all-important Services PMI number has been more resilient—thank you, UK consumer—but in Q4 of 2019 it has truly struggled to remain above the 50.0 no-change level. Lastly, both Manufacturing and Industrial Production—which measure actual sector output—have both come out with the second-worst readings since 2012. It’s not surprising therefore that the Bank of England’s Monetary Policy Committee is considering measures to support the economy, this morning that would be a welcome policy move.

Bottom line: At a time when the health of the UK economy is so crucial to securing good terms with its various trading partners, the situation is quickly going from bad to worse. A week ago, we mused that Johnson might have gained the upper hand in trade negotiations, but that now seems overly optimistic. Yes, the PM has a majority and clear plan of action, but the economy may not afford him the time to play his hand the way he might wish. Given that he and his chief advisor, Dominic Cummings, were instrumental in the EU Referendum outcome, it’s ironically appropriate that they’re eventually stung by their own schemes. Unfortunately, we are all on the same team and have been stung too. All focus turns to this Friday’s Retail Sales figure in hopes that the UK consumer continues to signal ‘all is well’.

The week ahead

GBP

The Sterling Index fell last week despite the safe passage of Boris Johnson’s Brexit deal through the House of Commons. The reason for the Pound’s disappointing week is that the focus has now shifted to the UK’s rigid deadline to agree on a trade deal with the EU. Members of the European Commission have reiterated to the UK Government that a full trade deal by the end of the year will not be possible and that both sides need to prioritise the most pressing issues. Members of the BoE have also indicated that UK interest rates may need to come lower to support the faltering economy, a further reason for Sterling’s dip.

  • Released Monday, the UK GDP reading showed a decline of 0.3% in November in contrast to the expected result of unchanged output. The UK economy will need to have grown 0.1% to 0.2% in December to avoid a fourth-quarter contraction.
  • Manufacturing production also fell on Monday, with the figure for November coming in at -1.7% in contrast to the expected -0.3% decrease.
  • On Wednesday, UK CPI will be released for the month of December. The consensus is for prices to have increased by 1.5%, unchanged from the previous reading.
  • UK Retail Sales data detailing December’s shopping numbers are due to be released this Friday. The predicted outcome is for a 0.8% increase after a decrease of 0.6% the previous month.

USD

Headlines from the Middle-East dominated the US Dollar last week after tensions increased between the US and Iran. As a safe-haven currency, the trade-weighted Dollar Index rose throughout the week as the market’s risk appetite waned. Data out of the US was mixed last week as the ADP Employment Change figure overshot expectations, but the headline Change in Non-Farm Payrolls number disappointed on Friday. Hostilities between the US and Iran calmed by the end of the week as both sides ‘stood down’ leading to a pullback for the Dollar, especially against the Euro. We’re set for a busy week as members of the Federal Open Market Committee are due to speak along with a slew of data releases.

  • Nothing significant Monday means that the first meaningful ecostats will be the US CPI and core CPI for December, due out on Tuesday. Month-on-month, the core figure is expected to remain at 0.2% while the overall reading is predicted to fall marginally from 0.3% to 0.2%.
  • Another measure of inflation is due on Wednesday as PPI and its core equivalent for the month of December will be released. Both figures are expected to improve month-on-month; core from -0.2% to 0.2% and the overall print from 0.0% to 0.2%.
  • On Thursday, US Retail Sales for December are predicted to have increased marginally from 0.2% to 0.3%, while the consensus is for Core Retail Sales to jump to 0.5% from 0.1%.
  • Preliminary University of Michigan Consumer Sentiment will be released on Friday. The release is expected to be largely unchanged from last month’s 99.2 figure.

EUR

As expected, it was a quiet week for Europe as markets focused on the ongoing geopolitical tensions elsewhere. The common currency began the week bouncing between the 50 and 100-day moving averages but fell below the 50-day measure as market risk appetite declined. This coming week, we’ll be keen to see if improved sentiment leads to a move higher for the Euro, despite a lack of high-tier data to come.

  • Month-on-month Industrial Production for November is due on Wednesday. The consensus is for a rebound from -0.5% to 0.3%. Buba President Jens Weidmann will also speak today.
  • French (0.4%) and German (0.5%) final CPI are due to be released unchanged on Wednesday and Thursday respectively.
  • Also, on Thursday, the monetary policy meeting accounts will be released, which is a detailed record of the ECB’s most recent meeting. It provides in-depth insights into the economic conditions that influenced its last rate decision.
  • ECB President Christine Lagarde will speak at a New Year’s reception in Frankfurt, also on Thursday.