Trump vs. May
Week Commencing Monday 23rd January 2017
UK: Retail sales disappoint as GBP induced inflation hits
UK retail sales suffered their biggest slump in more than four years in December, denting what had been projected to be an excellent quarter to the British economy.
Seasonally adjusted volumes, excluding fuel, were 2 percent lower in December than in November, the ONS reported on Friday. This was a much sharper drop than analysts had predicted. The consensus forecast was for a decline of just 0.3 percent. Despite the drop in December, over the fourth quarter as a whole, retail sales grew robustly.
Sales volumes, excluding fuel, were 1.4 percent higher in the fourth quarter than the third quarter. This means the retail sector will have continued to boost economic growth in the final months of 2016. The economic uncertainty of Brexit, coupled with the collapse of Sterling over the past few months, has led to an inflation boom with UK firms warning they will pass on their higher import costs to domestic prices.
Average store prices increased by 0.9 per cent in the year to December, with prices in fuel stores up by 9.7 per cent and 1 per cent in textile, clothing and footwear stores. Overall consumer price inflation rose to 1.6 per cent in December, the ONS reported earlier this week, the highest since July 2014.
CHINA: GDP hits target but headwinds make 2017 more difficult
China’s economy avoided a hard landing in 2016 thanks to robust monetary and fiscal stimulus, but policymakers are now bracing for headwinds as a possible trade war looms under the US presidency of Donald Trump.
Gross domestic product increased 6.8 percent in the three months through December from a year earlier, compared with a 6.7 percent estimates that market analysts predicted. The full-year expansion of 6.7 percent was the slowest since 1990, however still landed within the central governments 2016 target for the year.
Diving into the figures, retail sales increased by 10.9 percent from a year earlier in December, the strongest reading in a year and more than the projected 10.7 percent expected. Meanwhile, Industrial production rose by 6 percent in December from a year earlier, compares with the estimated 6.1 percent rise the market forecast.
Finally, fixed-asset investment, excluding rural areas, expanded 8.1 percent for the full year. All in all, China appears a long way away from the hard landing so many economists predicted.
EUR/USD returns to neutral footing this week after the Euro began holding its own against a more bullish greenback. In the absence of solid US or EU news this week, we expect a mixed trading session where US GDP provides the only real test to current levels. 1.10 remains out of the question, however we expect to see the pair continue to trade the range and settle in the 1.06 – 1.07 range by the end of the week.
GBP/USD continues to track to the upside as Sterling traders continue to bounce after Theresa May’s Brexit speech last week. We expect the week to remain mixed, unless we see a surprise uptick in UK GDP numbers towards the end of the week. Expect 1.25 to be tested, but potentially not broken.
GBP/EUR tracks higher on the back of Theresa May’s speech last week. In the absence on much European data, we expect rates to remains within the 1.14 – 1.16 range. It is unlikely we will see Sterling break through key EUR resistance levels, however it could continue to track higher as we draw closer to the end of the month.
Economic Calander for the Week
We have the all-important UK GDP figures on Thursday, with a strong reading expected despite Brexit woes for the UK economy. We expect GDP for the fourth quarter to decrease slightly, from 0.6 percent down to 0.5 percent.
Despite the slowdown, the annualised figure should remain at 2.1 percent for the year, putting the UK nearly at the top of the pile of G7 growth nations, just behind the US. Outside GDP, we have Mark Carney speaking on Wednesday and Theresa May meeting newly appointed US President Donald Trump on Thursday.
We have a reasonably quiet week for the US, with all eyes focusing on US GDP on Friday. We expect fourth quarter GDP to sit at 2.2 percent. Outside GDP, we expect existing home sales to push slightly lower at 5.5 million units versus 5.61 previously.
New home sales on Thursday should also track down to 586k from 592k previously. Finally, Core durable goods should drop from 0.6 percent to 0.5 percent.
In Europe, we await Mario Draghi’s comments on Monday, where any Brexit or European financial stability issues will likely be monitored closely. The only other indicator of note is the Eurozone Services PMI release on Tuesday, which we expect to tick up from 53.7 to 53.9. All in all, a quiet but decent week for the continent.