UK retail sales jump ahead of BoE decision; Stocks fall on the Fed

Summary:

• UK retail sales M/M: +1.4% vs +0.3% exp

• FTSE drops to lowest level in over 2 years

• Stocks react angrily to Fed decision; BOE at Midday

The latest read on consumer spending has shown a marked improvement with UK retail sales for November jumping far more than expected. A M/M figure of +1.4% was well above the +0.3% expected and the prior was also revised higher by 10 basis points to now stand at -0.4% for good measure. The month on month data is subject to pretty wild fluctuations and while the reading was no doubt boosted by one-off factors such as the Black Friday sales, this should be accounted for in the forecasts and it remains a pleasing beat nonetheless.

The latest retail sales figures for the UK showed a pleasing beat, but these figures remain of secondary importance compared to the ongoing Brexit developments in driving the pound.

This lunchtime we’ll get the final Bank of England rate decision of the year with the market giving almost no chance of any tangible change in policy. Having said that, given the recent Brexit developments there may well be a change in tone from Governor Carney and his fellow MPC members and we could well see some market moving news on this front.

Wall Street suffers worst drop on a Fed day in 2 decades

The FTSE is trading lower by around 1% on the day and has fallen to its lowest level in almost 2 years as global stocks have reacted angrily to the latest Fed decision. Yesterday evening, the US central bank delivered on a 9th interest rate hike in their current cycle and a failure to adopt a sufficiently dovish tone has seemingly roiled markets with the fall on Wall Street following the announcement the worst after a Fed rate decision since 1994.

The FTSE 100 (UK100 on xStation) has fallen back to levels not seen since the 2016 US election. The market has tumbled 16% from the all-time high made back in May of this year. Source: xStation

There weren’t too many major surprises in the lowering of forecasts for future rate increases or the language used in the accompanying statement, and it seems to be more a case of the markets incorrectly hoping the bank would offer them some concessions given the recent turmoil and on this front the bank has stood firm - despite recent pressure for lower rates from Trump. Chair Powell stated in his press conference that he did not see the central bank changing its policy of reducing the Fed’s balance sheet, a process known as quantitative tightening, from the current autopilot setting.

Investors have grown accustomed to a supportive Fed in recent years with the actions of Powell’s predecessors seeing the creation of the so-called Bernanke/Yellen put - the notion that the bank would act to support the stock markets in times of trouble. Powell’s stance seems more closely aligned to the Fed’s dual mandate of maximum employment and keeping inflation under control and it seems that he is not as willing as those before him to adjust policy due to adverse market movements.

In fact for the 7 meetings this year since Powell became chair, each one has seen the stock market end the day of Fed decisions in the red. While investors will bemoan the Fed’s latest actions the bank do seem to be letting some air out of the large rally seen in recent years and this could well be a good thing going forward as it reduces the chances of a large crash that would have occurred if the QE induced bubble was allowed to grow ever larger.