The market’s focus may be on geopolitical issues at the start of this week, but there is a large amount of economic data and more earnings releases to digest in the coming days. Last week was notable for its risk aversion. The S&P 500 fell 1.56% and the Vix index rose to its highest level in five months, the gold price reached a record, and the dollar was one of the world’s strongest currencies vs. the G10 and most emerging currencies. This was due to its appeal as a safe haven.

As we start a new week, the focus is on the oil price and events in the Middle East. So far, the fall out has been mild, as we have mentioned in previous notes. Thus, the focus is likely to shift to the economic data.

US Retail Sales: Will the consumer buckle under the pressure?  

The March retail sales figures will be released on Monday. Can the US consumer hold up in the face of strong inflation and the prospect of higher financing costs as the Fed is likely to delay any cut to interest rates? Analysts are expecting fairly muted core retail sales growth that exclude autos and gas. This is expected to have grown by 0.3% last month, the same rate as February. The control group of retail sales is expected to register 0.4% growth, after growth was 0% for February. The risks could be to the downside. Headline retail sales could suffer from a sharp drop in car sales. Consumer loan growth slipped in March on the back of reduced demand for car loans, demand for credit cards was also muted. There has been a notable increase in credit card delinquencies, which rose to the highest level since 2012, according to the latest Philadelphia Fed index, which also suggests that the US consumer is reaching its limits. Retailer commentary has been mixed to negative in recent weeks, and small business owners are reporting falling sales in regional Fed surveys.

The reason why consumption has held up so well in the face of Fed rate hikes is that the richest 20% in America have benefitted from the higher interest rates. If you have a chunky savings account, then the higher level of savings rates has helped to boost your capacity to consume. Thus, US retail sales tell a story of America haves and have nots. While there is a chance that retail sales could come in weaker than expected for March, dig into the data as it could show weaker consumption trends for the less well-off shoppers, with the richest Americans still holding up ok. This could also be revealed in the Fed’s Beige Book that will be released on Wednesday.

UK: Wages and inflation data to set the tone for the Bank of England

The big question for the UK this week is whether or not the wage data and CPI data for March will trigger a rate cut from the Bank of England in June. The market is expecting UK wage growth to slip to 5.5%, with the ex-bonus figure falling to 5.8% from 6.1%. While this is above the BOE’s 2% target rate, this is still good progress, and even with a decline in wage growth, real earnings, when adjusted for inflation, remain positive. This means that the decline in earnings should not be negative for the UK consumer.

Wage data, released on Tuesday, is expected to fall below the BOE’s forecast rate and there is expected to be more evidence that interest rates are working, and the jobs market is cooling. The unemployment rate is expected to pick up to 4% from 3.9%, however, analysts are expecting a 74k increase in employment for the last three months.

Another boost for the consumer could come from inflation data for March, which is released on Wednesday. The annual rate of headline CPI is expected to drop to 3.1%, down from 3.4%. The core rate is expected to drop to 4.1% from 5% and the core services rate of inflation is also expected to fall to 5.8% from 6.1%. In comparison, the US headline inflation rate was 3.4% for March, which would be higher than the UK rate if UK inflation falls as expected. The service rate of inflation is still expected to be significantly higher in the UK than the US, so while the UK is making headway on inflation, there is still some way to go on service price pressures.

The sharp decline in UK inflation that is expected this week is well expected, and prices are expected to fall further next month, potentially below the BOE’s 2% target rate. More and more analysts now expect the UK rate of inflation to fall below the US in the coming months, and for inflation to hover around the 2% rate for the rest of the year. This should give the BOE the option to cut interest rates later this year. The market is currently undecided if the first rate cut from the BOE will come in June or July of this year. If we get positive wage and inflation data then it could solidify the prospect of a June rate cut, which may weigh on sterling.

The UK will round the week off with retail sales, which are expected to rebound in March, bolstered by the earlier timing of Easter this year. Retail sales ex autos are expected to rise by 1% last month. The outlook for retail sales is mixed: on the one hand sales are expected to be hampered by bad weather, on the other hand, people’s finances have improved with the drop in inflation and the rise in real wage growth. Thus, the outlook for retail sales remains mixed, but this should not hamper the BOE from cutting rates later this year.

Europe: German survey data and March CPI in focus

The final reading of Eurozone CPI is expected to confirm that inflation in the currency bloc fell to 2.4% and the core rate is also expected to fall to 2.9%. The detail of this report is worth watching. The disinflation trend in core price growth is set to continue, however, service sector inflation is expected to be slower than anticipated. The details of super core inflation will be worth watching.

The German ZEW survey for April will give a timely indicator of what finance professionals in Germany think of the economy. The market expects an uptick in expectations and a better reading for the current situation, which is expected to recover to -76 from -80.5, which is still deep in negative territory and highlights how the German economy is struggling to gain momentum in the short term. German GDP is expected to struggle in Q1, and the country is only expected to rise by 0.2% for the whole of 2024. Thus, there may be an improvement in the ZEW, but it is unlikely to be a sign of a major economic bounce back for Germany.

Earnings update: Banks and Netflix are in focus

US banks are in focus this week as they continue to report Q1 earnings. JP Morgan and Citi both reported results on Friday. JP Morgan’s results triggered a deep sell off for the stock. It dropped more than 6% on Friday, after it reported disappointing net interest income. Overall, the financial sector is expected to report an earnings growth rate of 0.7% for Q1. However, this is expected to be driven by the insurance industry. Excluding the insurance sector, the financial sector earnings for Q1 is expected to be -6%. Banks are expected to be the sub sector of US financials that perform the worst during this earnings season, and that chimes with what we have heard from US banks so far.

Key earnings releases for this week include Goldman Sachs on Monday, Johnson & Johnson, Bank of America, Morgan Stanley, United Airlines and Omnicom report on Tuesday. US Bancorp reports on Wednesday. On Thursday, watch out for DR Horton, Blackstone and Netflix. The streaming giant will report earnings after the market closes, which is the start of the tech earnings season. On Friday, watch out for American Express. 

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