Mixed Signals for Footsie Ahead of CPI, Retail Sales

The latest data from the UK suggests the economy is experiencing a downturn, which could leave the benchmark stock index out of the Santa Rally.

The UK Facing Headwinds

Last week's release of UK monthly GDP figures showed a surprise slowing of the economy, with growth of -0.3% for October. Immediately after, traders increased bets that the BOE would be forced to cut rates over the next year. As much as 100bps in cuts are priced in, even after the BOE's rate decision left policy unchanged, and three MPC members voted for a hike. Traders are increasingly pricing in the potential for the UK economy to cool.

Furthering that narrative could come from a barrage of economic data coming out before the London open tomorrow. The key element will be the latest measure of inflation, with the headline annual change in prices expected to slow to 4.3% from 4.6% prior. That would still leave the UK as the major economy with the fastest inflation, despite the continuous drop in the reading. Core inflation is expected to remain even higher at 5.4% compared to 5.7% prior. Later in the week is the release of the final UK Q3 GDP figure, which is expected to be confirmed at 0% growth for the quarter. Also at the same time is the release of retail sales for November, which is expected to be once again negative at -1.8%. However, that would be an improvement over the -2.4% reported in October.

Keeping an Even Keel

For the FTSE 100, the slowing UK economy could be ambiguous. On the one hand, domestic firms could lose out on falling sales and profits. On the other hand, the BOE's move to a more dovish stance would leave the pound weaker, so major FTSE leaders who receive revenues from overseas could benefit from the weaker pound.

The issue also fits within the global economy, where Europe might face more than a shallow recession, and Chinese growth is expected to remain muted next year. The largest weighting on the index is Shell, which has been suffering from sliding crude prices for months (although recent tensions in the Red Sea have given crude a bit of a boost). HSBC is exposed to China's potential lack of growth, and Unilever receives substantial sales from Europe. The UK financial sector might also face difficulties if global yields fall, as lower rates are generally negative for banks. The question is whether the potential of a weaker pound, thanks to rate cuts, might offset the potential loss from sales due to a slowing global economy.

FTSE

On the technical side, the upward leg's corrective nature off 7260 suggests a slightly descending triangle pattern may be at play. In this case, breaking 7500 could open the door to lower territories. However, if 7750 is reclaimed, it would invalidate the bearish structure and bring forth a likely rangebound expectation to 7940.

Source: SpreadEx / UK 100

Key Takeaways

The UK economy is showing signs of slowing down, with GDP contracting and inflation remaining high. The BOE may cut interest rates by up to 1% next year to stimulate growth. This could negatively impact UK companies' sales but benefit those earning overseas revenue through a weaker pound. The UK also faces pressure from a potential European recession and slower Chinese growth, impacting FTSE 100 firms like Shell, HSBC, and Unilever.