Calmer Tones Prevail Into The Weekend

WHERE WE STAND – I’ll try to keep things short and sweet this morning, as it’s finally Friday after a long and tumultuous trading week.

Overall, conditions were relatively quiet yesterday, at least compared to the outsize moves seen in the aftermath of the cooler-than-expected US CPI data on Wednesday that is, with only a continued rally in Treasuries of note after some heavily-caveated dovish commentary from Fed Governor Waller.

That said, it was another busy day of US economic releases, with December’s retail sales report stealing the limelight. While headline sales missed expectations, rising 0.4% MoM compared to the 0.6% MoM consensus figure, that doesn’t tell the full story. Control group sales, which broadly reflects the basket of goods that feeds into the GDP calculation, rose 0.7% MoM, almost double the expected pace, while November’s headline sales figure was revised 0.1pp higher to 0.8% MoM.

Taking a step back, it was clearly a strong holiday spending season stateside, which should further serve to reinforce the ongoing narrative of ‘US exceptionalism’, and also serves as a useful reminder that one should never bet against the US consumer. Taking into account ongoing labour tightness, this positive spending momentum looks set to continue for the time being, firmly underpinning economic growth in the process.

In turn, this solid economic growth should fuel a decent clip of corporate earnings growth, which will leave the path of least resistance for equities continuing to lead to the upside. That said, stocks will still have to contend with the removal of the ‘Fed put’ this year, as well as greater fiscal policy uncertainty, both of which will likely see volatility remain somewhat elevated.

In any case, the US macro backdrop at the moment, at least per December’s data, is one that points to the ‘best of all worlds’ – higher employment, falling core inflation, and a strong consumer. Not a bad inheritance for President-elect Trump to pick up on Monday!

On this side of the pond, things are, naturally, not quite as rosy.

Minutes from the ECB’s December meeting showed policymakers increasingly fretting about the eurozone’s growth outlook, with the baseline forecast in the latest staff macroeconomic projections “probably…too optimistic”, given its assumptions that the bloc’s trade policies would remain unchanged. Clearly, this now seems fanciful, given the likelihood of the aforementioned Trump slapping tariffs on the eurozone in relatively short order.

The minutes also pointed to increased potential for undershooting the 2% inflation aim which, when combined with those growth worries, cements the case for 25bp cuts at every meeting for the time being. Still, the EUR seems fairly priced around the $1.03 handle, and its tough to argue the risk/reward favours shorts at this juncture.

On the subject of growth, the latest UK GDP figures, released yesterday, once more painted a grim picture of the economic backdrop.

Per the data, the economy grew by a meagre 0.1% MoM in November which, although snapping a run of back-to-back monthly contractions, is hardly cause for celebration. Fundamentally, the UK continues to grapple with a stagnating economy, along with sticky price pressures – a grim combination which, while Gilts have pared recent declines this week, still poses a significant headache for Chancellor Reeves, whose fiscal headroom has been all-but-eliminated. My view on the UK remains that GBP assets, in general, are highly unattractive, and will likely remain so for some time.

LOOK AHEAD – Today’s docket looks busy, though deceptively so, with none of the scheduled releases likely to be particularly market-moving.

Nevertheless, those releases include the latest UK retail sales, December’s final eurozone CPI figure, as well as housing starts, building permits, and industrial production from the US. Also, of note, is that the Fed’s pre-meeting ‘blackout’ period begins at today’s close.