The week ahead – UK CPI, GDP and Retail Sales and US bank earnings

1) UK CPI (Dec) M/M – 15/01 – The rebound from the 1.7% lows that we saw in September continued in last month's November CPI release which came in at 2.6% which was broadly in line with expectations. Core prices also ticked higher to 3.5% from 3.3% prompting a warning from Bank of England governor Andrew Bailey that further cuts were likely to be more gradual given the increased economic uncertainty that is prevailing at the moment. While the Bank of England kept rates unchanged on a 6-3 vote at its December meeting, it is apparent that we could see further moves to the dovish camp in the weeks ahead especially if growth continues to disappoint. With Dave Ramsden and Alan Taylor joining Swathi Dhingra in the dovish camp it seems likely we could see a 25bps cut in February, however the MPC does need to be careful given that a slide in the pound could make inflation much stickier in the longer term with further cuts serving to keep prices higher. Inflation in the UK tends to be much stickier given on a historical level due to the fact that we are a price taker when it comes to our sizable trade deficit. Sticky wages are also a concern with little likelihood of a slowdown in the short term. Services inflation remained steady at 5% and looks set to remain sticky for some time, particularly since retailers may well raise prices in an attempt to absorb the increase in costs, they are due to get hit with when the new tax year begins in April.     

2) US CPI (Dec) M/M – 15/01 – US inflation has been slightly more benign over the past few months, rebounding modestly from lows of 2.4% in September, to its current level of 2.7%, which perhaps help explain why Fed rate cuts have been slightly more aggressive in recent months with the strong US dollar also helping to keep a lid on price pressures. Nonetheless the US economy is proving to be more resilient with another strong jobs report in December, while weekly jobless claims also remain fairly low at 201k.                          

3) UK GDP (Nov) – 16/01 – The UK economy looks to be heading for recession if recent economic data is any guide. While the recent UK Q3 GDP revisions saw growth downgraded from 0.1% to 0%, the reality is that this could still get revised lower, as the impact of the government’s recent rhetoric and new tax measures continues to hammer both consumer and business confidence. In the monthly GDP numbers, which do tend to be volatile there is still a discernible trend playing out and it’s not a positive one.  While inflation is still eroding disposable income, consumer confidence has collapsed and the services sector is battening down the hatches. In October and November, the monthly GDP numbers saw contractions of -0.1% with a similar weak reading in December raising the prospect that Q4 could see the economy contract, bringing to a close a year of 2 halves when it comes to the UK economy. Recent PMI numbers, as well as weak retail sales suggest the economic outlook remains challenging given the growing doubts about the competence of the current UK government when it comes to the fiscal stewardship of the economy. With talk of further tax rises doing the rounds as the Chancellor's fiscal head room disappears on the altar of higher borrowing costs the incentives for businesses to hire will diminish further in what is likely to become a vicious circle of decline. Far better surely to scrap the ludicrous amounts of money being spent on carbon capture and other government pet projects and free up fiscal headroom that way.          

4) UK Retail Sales (Dec) – 17/01 – December retail sales are always tricky to predict at the best of times and this year is no different. We did see a modest rebound in November of 0.2% after a sharp -0.7% decline in October caused by all of the noise around the recent budget, which prompted consumers and businesses to hunker down. Black Friday discounts helped the November numbers post a modest recovery with retailers putting all of their hopes in this week’s up and coming December numbers. This week’s numbers from the likes of Next, Tesco and Sainsbury and Marks and Spencer show that the UK consumer is far from dead and buried, however it does show that spending patterns are slowing and becoming much more discerning. The most recent BRC numbers showed a similar pattern helping to reinforce concerns of a weak consumer outlook, with credit card spending also pointing to weak demand. We also have more retail and services provider earnings releases in the form of Ocado’s Q4 2024 results and Premier Inn owner Whitbread’s Q3 numbers for fiscal 2025 which are out on the 14th and 16th January respectively.

5) JPMorgan Chase Q4 24 – 15/01 – The US banking sector shrugged off the concerns of 2023 about the mid-tier banking sector in the wake of the collapse of Silicon Valley Bank due to a combination of exposure to rising interest rates due to over exposure in US long dated treasury bonds, and an over concentration of customer deposits in the tech sector, which was heavily exposed to sharp rises in interest rates. Some recoveries were stronger than others with JPMorgan putting in fresh record highs in 2024, in the aftermath of its Q3 numbers and the re-election of President Trump back in November. In Q3 the bank recorded revenue of $43.32bn an increase of 6%, while profits slowed by 2% to $12.9bn, although this was mainly due to higher reserve builds, and provisions for credit losses due to increases in its credit card loan book.  The bank raised its guidance for Net interest income to $92.5bn, up from its previous $91bn guidance. The pop in banking shares in the aftermath of Trump’s win appears to be due to an expectation that we might see some easing in financial regulation. Q4 profits are expected to come in at $3.98 a share    

6) Goldman Sachs Q4 24 – 15/01 – Goldman Sachs also saw strong gains in its share price in 2024, with the shares also hitting record highs in the aftermath of the Trump win. The bank has also seen a strong performance across all its trading businesses topping expectations when it reported in Q3 due to strong performance in its equities trading business and investment banking operations. Q3 revenues came in at $12.7bn, an increase of 7%, while profits rose 45% to $2.99bn, although much of this increase in profit was down to the comparatives from last year which saw the business take a profit hit after it sold off its GreenSky operation to a private equity group. As we look towards Q4 expectations are for adjusted EPS of $8.11 a share.   We are also expecting to see Q4 numbers from Wells Fargo and Citigroup.