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The Year (in Data) Begins Today?

Disappointing retail sales from the UK, Japan's rates in negative territory, US labour data released, and today's market focus.

As the Christmas trees come down this weekend, we get down to reality with a bump. Given it’s the first Friday of the month and indeed the new year, there’s a string of data releases which markets will be keeping a close eye on.

It’s a mixed bag of news from the UK, with retail sales disappointing, interest on savings booming and automotive sales back to pre-pandemic levels:

December was a disappointment according to the British Retail consortium, who said that footfall to bricks and mortar retailers fell by 5%, mostly due to the weather! The fall was unevenly spread across the country though, with Scots more inclined to brave the weather than the Welsh and the British.

There were a couple of peaks around sale shopping days, such as Boxing Day, but this won’t be the most welcome of news for retailers who, at that point, are traditionally clearing through the end of their festive stockpiles, not the bulk of it.

Earlier in the week we saw Next PLC get a share price boost after it posted better than expected results for the festive trading period. The retailer has traditionally been seen as a bellwether for the high street, but has been outperforming it in recent years, leading us to question what have they got right that others are missing?

Elsewhere, increased interest rates from the Bank of England have handed households £34bn in increased savings interest, according to the Resolution Foundation. The increase more than offsets the additional £18bn of interest payments to service debts, but you won’t be surprised to hear that this won’t be felt evenly – with those with large debt repayments less likely to have material savings from which to earn interest.

This can best be seen by age demographic, with households headed by someone aged 65 to 74 having about three times the amount of interest bearing savings compared to households of 35 to 44 years of age – the former having £14k of outstanding debt on average, with the latter £98k!

The data comes with a warning though, which is that the cost of living issues could have a long tailwind, as more households are having to remortgage into higher interest rate deals before the likely gradual fall in rates begins in the latter part of the year and into 2025.

The Society of Motor Manufacturers and Traders published 2023 sales numbers, which are the best since the pandemic and about 20% higher than they were last year. The industry sold 1.94 million cars last year and a lot of the purchasing was down to fleet owners replenishing their stocks, having struggled to in 2021 and 2022 because of supply chain issues.

It’s not all good news though, as the UK private motorist is still struggling with the cost of living and there was no increase in domestic sales year on year.

In a world of higher interest rates, it’s easy to forget that Japan’s rates are still in negative territory.

The bank of Japan has had rates at -0.1% since 2016 – and amazingly rates haven’t been above 1% since the mid 90’s – as they’ve struggled with deflation since the Asian Financial Crisis.

Investors had geared up for ‘lift off’ of interest rates this year, only to be left with a big question mark over the policy when, on New Years Day, the earthquake struck. Yesterday however, we heard from the Bank of Japan Governor who “hope(s) wages and prices will rise in a balanced manner” this year.

Japan matters because it is the world’s 4th largest economy (3rd if you don’t treat the EU as one bloc) and also has the largest amount of debt to GDP of any developed nation – and by some margin, sitting at 263% compared to Italy at 141% and the US at 129%.

Japan is also suffering from their currency, the Yen, sitting at record lows which is making imports expensive, and the country imports a lot of its food and fuel. So even a modest hike in rates might help here, but also creates a double edged sword of raising debt servicing costs which the government may find uncomfortable.

All Eyes on US Labour Market

At 12:30 this afternoon, markets will turn their attention to the string of US labour data, in order to gain further insight into the health of the world’s largest economy. Given that the health of the US labour market is often taken as an important litmus test in looking at the impact of the Fed’s interest rate policy on the real economy, markets will be paying close attention to how the data may influence policy makers moving forward. As we looked at yesterday, the Fed minutes cited how “the actual policy path” of the Fed’s interest rate cycle “will depend on how the economy evolves”. Hence, given their implications on inflation, a greater-than-expected uptick in average earnings or nonfarm payrolls could indicate that the Fed have more work to do in maintaining rates higher for longer.

Chief amongst the data points will be Nonfarm, unemployment rate, labour force participation rate and average hourly earnings.

Markets are today projecting a Nonfarm payroll print of 170,000, a slightly softer print from last month’s figure of 199,000. If such a figure is realised, it would be further indication of the slowdown in the US labour market, having been the third consecutive month where new jobs have fallen below their one-year average of 240,000. This slowdown comes as monetary conditions remain at their tightest level in 22-years across the states, as markets forecast what could be the lowest annual level of job creation since 2019 (outside of 2020 pandemic year).

While the US labour market shows signs of cooling, Powell has long said that the payrolls number would need to ease to some 100,000 to remain in line with population growth while not overly feeding into inflationary pressures. Hence, even a relatively softer-than-expected print could still be indicative of a labour market which remains resilient and an economic growth which continues to outpace its counterparts.

Today in Focus

As discussed, today’s primary market focus will be on US labour market data, with the data likely to have an impact across capital markets. Elsewhere, markets will be keeping a close eye on Eurozone HICP inflation data at 10:00 and US ISM data released at 1500. Given it’s the first full day today in the new year, its likely that trading desks will be back to full capacity, and looking to set their stall out. So, as the Christmas tress come down, trading volumes will likely go up.

Have a great weekend.

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