European markets are struggling to maintain the pace set by US equities yesterday with the likes of the FTSE 100, DAX, and CAC all treading water as markets look ahead to an impending inflation release from the US. A raft of data out of the UK brought little clarity for traders, with a disappointing GDP reading offset by a retail sales bump. Meanwhile, a busy Asian session saw BoJ rate hike expectations ease, as both headline and core inflation slumped in the month of November. Nonetheless, the big bout of volatility came in China, where the announcement of fresh regulatory measured aimed at curbing in-game spending saw tech giants Tencent and NetEase shares plunge. Aside from questions over the pace of any Chinese recovery, the unpredictable regulatory approach taken over recent years will serve as a warning for anyone seeking to invest in Chinese stocks going forward.
The UK economy has come back into focus once again this morning, with a downward revision to third quarter growth counteracted by a welcome rebound in retail spending in November. The downward revision to third quarter growth saw GDP over that three-month period fall into negative territory, with the -0.1% reading serving as a warning that we could yet see the widely anticipated UK recession in 2023. A year ago, markets were looking towards the UK as a likely source of economic weakness, with both the IMF and Bank of England predicting the UK economy to shrink over the course of 2023. For the most part the UK has outperformed expectations, with the Germany instead looking at risk of a recession this year. Nonetheless, the third quarter -0.1% decline now sees the UK treading the same pathway as the German, French and wider eurozone economies. From a monetary policy standpoint, this does feed into the narrative that we will see a more dovish narrative from the ECB and Bank of England, with the current growth and inflation trajectory allowing for a pivot next year.
The latest UK retail sales report provided a bit of something for everyone, with a 1.3% surge in November spending counterbalanced by concerns over the implications for inflation. The month of November represents a key month for retailers as the Black Friday and Cyber Monday sales fire the starting gun for a period of consumption that leads up to the forthcoming Christmas holidays. With spending on the rise, an optimist might conclude that healthy consumption levels could bring a bumper December for the high street. However, strong November sales can bring cause for concern as consumers seek to bring forward their spending in a bid to take advantage of discounted prices that will lower margins for big retailers. Meanwhile, consumers continue to spend more to simply maintain their standard of living, with the period since February 2020 seeing a 18.6% jump in spending, while consumers received 1.5% less for that money.
Markets will be firmly focused on the latest core PCE price index data out of the US, with mixed messages from the Federal Reserve bringing the need for greater clarity over the direction of US inflation. The incessant push for Federal Reserve members to rein in expectations over the pace of 2023 rate cuts does pose a risk for markets given the lofty expectations of 150 basis points worth of downside to the Fed funds rate. With the Fed’s favoured inflation gauge expected to tick lower from the October 3.5% reading, bulls will hope to see price pressures abate at a faster clip to the benefit of risk assets. Nonetheless, it is abundantly clear that we will not see this gauge fall back to target by the time markets expect to see the Fed cut rates, highlighting the strong chance that current market pricing is somewhat unrealistic.
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