European markets were on course for a fairly positive day yesterday until the release of the latest US retail sales numbers for December, which had been delayed due to the US government shutdown in January.

No-one was expecting anything particularly out of the ordinary, which made the released number so unexpected, and in the process managed to throw a great deal of shade on how well the US economy is actually doing. The 1.2% decline was also the biggest decline seen since 2009 and served to push the S&P500 lower for the first time in four days.

The decline also served to puncture a lot of this week’s optimism over the change in tone with respect to the apparent progress in the ongoing US, China trade talks, with reports that President Trump could extend the deadline by sixty days.

For quite some time it’s almost been an article of faith that the US economy still sits apart from the slowdown in the rest of the global economy. This week’s US inflation numbers should have been a positive for the US consumer, a weak number, set alongside decent wages growth, and strong payrolls, however the release of retail sales for December was a huge surprise, coming in at -1.2%, while excluding autos they plunged 1.8%, against an expectation of no change.

President Trump’s Chief economic advisor Larry Kudlow called the numbers “a glitch” while others argued that the decline was down to US consumers front loading purchases in November due to Black Friday sales, however that argument falls apart when you look at the November numbers which were also revised lower to a measly 0.1%.

It also begs the question if they were this bad in December, how bad could they be in January when the US government was shut down for over 30 days? The number sent US yields tumbling as investors once again turned pessimistic on further US rate rises.

With concerns already abounding about the extent of the global economic slowdown, the US economy was the one bright light in an ever-darkening sky. That light is shining a little less brightly after yesterday’s numbers, and while it is only one number, consumer confidence numbers have also softened in recent months as well.

Aside from the concern over the US economy, the US, China trade talks look nowhere close to any sort of win after it was reported that the two sides were quite a way apart on reform demands. This rather begs the question as to what gets decided with respect to the March deadline on the increase of tariffs. It’s been suggested that they might be deferred for sixty days if there are significant areas of progress, however this seems far from certain. With reports that Chinese President Xi Jinping is due to meet the US delegation today, the best markets can probably hope for is for the talks to continue, and the deadline extended.

These concerns have extended into Asia markets this morning and look set to result in a lower European open.

The pound came under further pressure yesterday in the wake of comments from Bank of England external policymaker Gertjan Vlieghe who said it was highly unlikely that the Bank of England would be looking to raise rates any time soon, even if Brexit turned out to be a benign outcome.

He said that the slowing global economy would weigh on any decision on monetary policy for the foreseeable future. He even suggested that rates might have to go lower, if economic conditions worsened, something that might well be inevitable if there a “no deal” Brexit, which remains the current default position given the current political gridlock.

This showed no signs of changing after a number of Conservative MPs abstained on the latest government motion on the Prime Minister’s Brexit plan. They objected to the inclusion of an amendment that would take the prospect of “no deal” off the table.

While the vote was only advisory, the signal it sends to Brussels is of a UK parliament that can’t decide from one day to the next as to what its common position could possibly be.

What was even more concerning is that MPs from both sides of the party weren’t happy with the motion. The added complication of recent reports that the Prime Minister isn’t acting in good faith, after this week’s reported comments from chief negotiator Olly Robbins in a Brussels bar, haven’t exactly helped instil trust in the Prime Minister, after it was reported that the plan was to present MPs with a choice of her deal, or a long extension, in the coming weeks. This is different to what she has been saying publicly, that its her deal or no deal.

On the economic data front, we’ve seen some significant weakness in a lot of the economic data these past few weeks, and this could well be exacerbated later today with the latest January retail sales numbers. In December retail sales plunged 1.3%, though most of this was down to front loading in November and Black Friday discounting which saw November sales rise 1.2%.

Expectations are for a modest pickup in January of 0.2%, having seen real wages rise further at the beginning of this year, though this might be offset by some modest post-Christmas belt tightening, by those who probably spent a little too much in the weeks leading up to the end of the year.

EURUSD – while we hold above the 1.1250 level the euro remains susceptible to a rebound, however the lack of any rebound does suggest further weakness is on its way. A fall below 1.1200 opens up the 1.1000 level.  A move back above 1.1350 opens up a move towards 1.1400.

GBPUSD – slid below 1.2820 yesterday and looks set for a move towards the 1.2700 area in the short term. We need to see a move back above the 1.2880 area to trigger a move back to the 1.3020 area.

EURGBP – looks to be heading back to the 200-day MA at 0.8860, after moving above the 0.8820 area, and last week’s peak. A fall back below the 0.8800 area argues for a move back towards the 0.8770 area.

USDJPY – fell short of the 200-day MA at 111.30, making a high of 111.11, before slipping back. A break of the 200-day MA opens up the 112.30 area. Support now lies back near the 110.20 level, this week’s breakout level.

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