There goes the mandate
Bank of England (BoE) member Gertjan Vlieghe stated that he sees the pace of UK rate hiking as somewhat slower following the recent poor economic data. If a Brexit deal is reached, the degree of tightening would depend on how much Sterling appreciated, but ‘no deal’ would mean lowering or holding rates would be more appropriate.
Sterling drifted lower as gilt-edged bond yields continued to drop, and 20-year yields are at the lowest level since August 2017. Losses accelerated by the afternoon on speculation of government defeats in parliament. The main government motion to express confidence in its Brexit strategy was overturned, effectively removing the mandate to renegotiate and increasing doubt that the EU would be willing to make concessions. Sterling dipped again after the vote, settling around 1.1340 against the Euro and just below 1.2800 against the Dollar. There was a slight recovery on Friday ahead of the UK retail sales data with overall confusion and uncertainty over the UK Brexit policy curbing Sterling support.
Headline US retail sales declined 1.2% for December compared with consensus forecasts of a 0.1% gain while underlying sales fell 1.4% and the control group, which aims to capture core sales, declined 1.7%. The release had been delayed by the Federal government shutdown and markets were sceptical over the data’s accuracy, especially given potential distortions. Nevertheless, the result was the sharpest decline for nine years and there was a downgrading of fourth-quarter GDP estimates with sharp Dollar losses. Initial jobless claims increased to 239,000 in the latest week from a revised 235,000 with the moving average at a one-year high. Producer prices data was mixed with a small headline drop offset by a 0.3% core increase.
Federal Reserve (Fed) Governor Brainard stated that the process of policy normalisation through the balance sheet reduction should come to an end this year. She also remarked that there are a variety of downside economic risks, including slowdowns in Europe and China which she was monitoring closely. Given that downside risks have grown, her view was that the Fed had to wait and see on policy. This was a significant dovish shift from Brainard which hampered the Dollar.
German GDP failed to grow in Q4 of last year, with the country avoiding a technical recession by the very smallest of margins. Underlying sentiment for the Eurozone remains very fragile despite the region’s Q4 GDP confirmed at 0.2%. Tomorrow, we may see Spain officially call a general election which will only add to the turmoil surrounding the EU.
The Euro struggled to break through the 1.1300 handle of the back of these pieces of data. Versus the Dollar, the Euro hit three-month lows on the back of fears that if the US reach a deal with China then they could impose tariffs on the EU.
Data today sees CPI numbers out of Spain, global trade balance out of Italy, retail sales out of the UK and the EU followed by the European Central Bank’s (ECB) Coeure speech just after lunch.
Data to watch:
01:30 CNY Consumer Price Index (YoY) (Jan)
04:30 JPY Industrial Production (YoY) (Dec)
09:30 GBP Retail Sales ex-Fuel (MoM) (Jan)
09:30 GBP Retail Sales ex-Fuel (YoY) (Jan)
09:30 GBP Retail Sales (MoM) (Jan)
09:30 GBP Retail Sales (YoY) (Jan)
13:30 EUR ECB’s Cœuré speech
14:15 USD Industrial Production (MoM) (Jan)
14:55 USD Fed’s Bostic speech
15:00 USD Michigan Consumer Sentiment Index (Feb)