Market Update

The UK experienced significant developments in its economic landscape this week. CPI inflation in the country slowed down to 1.3% in December, marking its lowest point since November 2016 and falling well below the Bank of England's 2% target. This decline was attributed to the stronger pound, which reduced import prices. Despite Christmas discounts, UK consumers tightened their spending, leading to a 0.6% drop in retail sales. This ongoing trend resulted in five consecutive months of either stagnation or decline in retail sales, the longest period without growth since 1996.
In November 2019, UK GDP contracted by 0.3%, raising concerns about economic expansion. With household expenditure constituting approximately 60% of the UK economy, the weak data reinforced the argument for lower interest rates. While some Bank of England policymakers had previously suggested a potential rate hike, Gertjan Vlieghe advocated for a rate cut if crucial data did not show improvement.
Contrastingly, US equities thrived due to the partial trade deal signed with China, which committed China to curbing the theft of American technology by its companies. The US economy also demonstrated stability, with modest expansion observed in the final weeks of 2019. The Federal Reserve indicated a willingness to tolerate higher inflation, especially since their preferred inflation measure, the core PCE deflator, remained below the 2% target at 1.6%.
Chinese data suggested economic stabilization, evident in the rise of exports by 7.6% and a substantial increase in imports by 16.3% in December. Industrial production, retail sales, and Q4 GDP in China remained positive.
Looking ahead, the World Economic Forum's annual conference in Davos, Switzerland, is set to bring together influential figures. Additionally, the upcoming week will feature monetary policy meetings by the European Central Bank and the Bank of Japan, along with the release of UK employment data (including the unemployment rate and weekly earnings), and Purchasing Managers' Index (PMI) data for the US, UK, and Eurozone.