Weakening consumption and energy prices help boost market sentiment

• UK retail sales weaken, boosting FTSE 100 sentiment
• Energy slump helps ease inflation outlook
• Markets expecting swift easing from the Fed, but is that realistic?

European markets are heading towards the weekend on a positive footing, with the DAX hitting a fresh two-month high today. The pound has come into view thanks to a worrying retail sales figure, which slumped to -2.7% over the course of the year. This represents the 19^th monthly contraction in sales volumes, as inflationary pressures mean consumers pay more to receive less. While the onset of this inflation boom saw consumers ramp up their spending in a bid to maintain their quality of living, their ability to pay more has been stretched to the point where spending is largely flat, but consumers instead receive less for their money. Coming in a week that has seen Walmart and Burberry tumble on a less convincing Q4 outlook, investors are undoubtedly starting to look at this festive period as one which could see retailers struggle. Nonetheless, the strength of the FTSE 100 highlights the hope that this weak spending environment helps drive down inflation, with the Bank of England undoubtedly happy to see consumers put pressure on businesses to compete on price once again.

Energy prices saw a sharp collapse yesterday, with crude oil and natural gas heading swiftly lower to the glee of central bankers. The decline in crude saw WTI fall into a four-month low, helping further allay fears that the events in the Middle East are going to have a tangible impact on energy prices. Notably, the recent optimism for global markets has glossed over the potential economic weakness that could be impending as we await the normalization of inflation. The collapse in energy prices do highlight how the weakening consumption outlook seen by retailers could translate into a similarly underwhelming demand environment for fuel.

From a wider perspective, the optimism seen in equity markets could reflect the potential impact any economic weakness could have on the timing of a rate cut. With crude declines dampening inflation expectations, a notable period of economic weakness would likely see markets increasingly bring forward their expected timing for an initial rate cut. After-all, markets are looking as early as March for the first move, with pricing around a potential cut increasing to 35%. With the Fed dot plot currently showing a mere 50 basis points worth of easing for 2024, they will either have to take on a more dovish outlook or else warn markets that the 100bp worth of cuts currently bring priced-in are unlikely.