Markets Crash ... Just Don't Look Now ...

Strong UK Data in the UK ...
It was a week of strong economic data in the UK, which should have cheered markets. Headline inflation fell to 2.3% in November from 2.4% prior month. Producer prices fell as input costs slowed to 5.6% from 10.3%.

Oil prices came under further pressure with Brent crude closing at $54 dollar a barrel. WTI was down below the critical $50 level at $45 dollars reducing pressure on prices across the globe.

In the UK, inflation is falling (2.3%) as earning are rising (3.3%). The Bank Of England held rates in November. Real Earnings are rising with no threat to jobs or mortgage rates in the short term. Despite warning sounds from retail last week and stories of the "November Apocalyse" which will "Dash Retailers to Pieces", official data revealed retail sales were up by 5% in the month.

Sales volumes were up by 3.6%, values were up by 5%. Online sales were up by 13% accounting for almost 22% of total transactions. It is the pattern of spending which is creating problems for retail, not the absolute level of spend. We expect a strong December to finish off the year. Retailers without a strong multi channel strategy may well be finished off.

Strong spending is assisting the Chancellor of the Exchequer.  Government borrowing fell to £7.2 billion in November, from £8.1 billion prior year. It was the lowest level of November borrowing for 14 years. Year to date borrowing was £32.8 billion down by 30% from prior year. Borrowing will fall to below £30 billion in the financial year, achieving a similar level next year.

Official data confirmed growth was up by 1.5% in the third quarter, from 1.3% in the first half of the year. Household spending was up by 1.8%, government spending and investment fell. We expect growth of 1.4% this year and around 1.5% in 2019.

"Fed Hikes Rates ..."
US markets crashed again last week. The Dow and S&P fell by 7%. NASDAQ fell by over 8%. The 6,000 support level came under threat, the August high of 7,660 long forgotten. NASDAQ delivered a twenty per cent drop in the quarter. Ouch!

Markets over reacted to the Fed rate hike. The 25 basis points rise an indicator of strong growth and earnings potential in the U.S.A. The hike should have led to a recovery in prices, contrarians take position as prices tumble.

Fed Chair Jerome Powell lowered growth expectations for 2019 to around 2.3%, from 3% this year. Two further interest rate increases are now plotted in for the year ahead. Markets and the President were displeased. Trump has discussed with close allies the possibility of sacking the Chairman of the Fed. Let's hope not. The resignation of Mad Dog Mattis was a sufficient blow to White House credibility this week.

"Mad Dog Mattis ... Resigns ..."
John Kelly, now Mad Dog Mattis; the President has lost his Chief of Staff and now his Secretary of Defence in just a couple of weeks. The President decided to pull troops out of Syria and Afghanistan following a phone call with President Erdogan of Turkey.

For Defence Secretary James Mattis this was all too much. He will resign at the end of February, sending a note to the President in which he made it clear, The President deserved a Secretary "whose views are better aligned with your own."

The Mattis announcement came a day after the White revealed the U.S. would be withdrawing troops from Syria and halving the troop commitment in Afghanistan. Both moves have been met with opposition from the Pentagon and with members of the foreign policy establishment.

The President is taking a wrecking ball to the pillars of foreign policy honed over the past seventy years. The threat to NATO is unacceptable to many, the apologist approach to the Kremlin, too much and too soon.

"We must do everything possible to advance an international order that is most conducive to our security, prosperity and values." Mattis explained,  "We are strengthened in this effort by the solidarity of our [traditional] alliances."

The President continues to take briefings from Fox News and Foreign Presidents, ignoring the advice of Cabinet and Key institutions in the USA. This week sees a partial shut down of Federal Government faced with Trump obstinacy over funding for the wall. Here's hoping for a partial shut down in the White House and a rounding of opinion in the Oval Office in the year ahead!

That's all for this week, have a great week-end. Have a great Christmas and New Year. I wish you and your families all the best for the holiday and the year ahead. We will be taking a short break from economics and markets! A chance to think about our plans for 2019.

John