Alarm bells ringing from Next

Retail sector looks to a difficult year ahead

After a strong start to the new year for most, the retail sector stands out as a particularly sick dog. Next confirmed this and sent a chill through the rest of the British retail sector at the start of the Christmas reporting season by cutting its profit guidance for 2016/17 and reporting a fall in sales of 0.4% over the festive period.

Retailers are in a tough environment right now, shop prices are in decline, the post referendum weaker pound is pushing costs up and on the horizon more clouds are forming as consumers will be faced with a squeeze on their disposable income as inflation is set to rise. Retailers across the board look set to struggle and Next are more than likely just the first in a line that will report disappointing results.  Next are ringing the alarm bells for the rest of the sector and these bells could continue ringing as we see M&S and Tesco reporting later in the week.

Construction PMI to follow the manufacturing PMI’s impressive print?

After a stronger than expected manufacturing PMI in the previous session, investors will be looking keenly towards the construction PMI which is due for release later this morning. The figure is expected to show an increase further into expansion territory from 52.8 to 53. Given yesterday’s beat in manufacturing and the fact that construction PMI has a tendency to show similar behaviour to the manufacturing and service PMI’s, a better than expected figure could also be on the cards.

The market will be watching for further signs that the industry is shrugging off Brexit related woes and the PMI has in fact returned to levels seen before the buy to let restrictions were implemented in Spring 2016.

Should the print surprise on the upside we could see sterling take another leg up in its recovery towards the $1.2300; on the flipside a disappointing figure could see a move back towards $1.2200. That said any movement could be limited as investors hang out for the main risk event of the day – the FOMC December meeting minutes.

FOMC Minutes keeps the dollar in focus

The dollar was seen consolidating impressive gains which pushed it to fresh 14 year highs following stronger than expected manufacturing data in the previous session. The encouraging economic data reflects the confidence that a Trump administration is good for business and would accelerate economic growth through fiscal stimulus and reduced regulation. The strong data lifted US bond yields giving fresh legs to the dollar rally, which had been taking a breather last week.

The dollar will be in focus once again, as the FOMC will publish its minutes from the December meeting. The Committee is expected to deliver a hawkish message and investors will be looking closely for any further clues as to what the Federal Reserve is looking for from new President Trump and how that will translate into the number of rate hikes that we can expect in 2017. Currently the expectation is for three hikes, however it is unclear to what extent fiscal stimulus has been built into the forecasts and also to what extent the global reflation theme has been accounted for. Should the minutes also provide upbeat growth forecasts this will almost certainly blow fresh wind in the sails of the dollar rally.