Construction grows retailers drag

Construction PMI leaves plenty to cheer, but rising cost pressure shouldn’t be ignored The FTSE looks set to finish the day more or less flat […]

Fiona Cincotta
By :  ,  Senior Market Analyst

Construction PMI leaves plenty to cheer, but rising cost pressure shouldn’t be ignored

The FTSE looks set to finish the day more or less flat as alarm bells for the retail sector where outweighed by positivity for the house builders, following better than expected construction data. UK construction PMI followed in the footsteps of the manufacturing PMI from the previous session and surpassed expectations with a reading of 54.2, the strongest in 11 months. There was plenty to cheer such as stronger demand pattern, job creation and a broad-based upturn in business activity which pushed house building stocks higher; however, an increasing cost pressure cannot be ignored, as suppliers pass on higher imported raw material prices following the 15% decline in the value of the pound since the EU referendum. With Article 50 set to be triggered in a few months the outlook for the sector is uncertain but at least the foundations appear to be solid.

Growing divergence between UK and US retailers

Retailers set off on the wrong foot following a bleak outlook from Next and disappointing sales for the festive period; the sector failed to turn around throughout the course of the day as fears that more of the same is set to follow as other retailers report throughout the week. Of interest, whilst the UK retail sector was suffering at the hands of investors, the US retail sector was trading significantly higher as recent indications point towards strong holiday sales drawing more attention to the growing divergence between the two economies.

Eurozone inflation jumps

Eurozone inflation beat expectations and jumped to 1.1% in December, reaching the highest level since September 2013. The jump in inflation is mainly due to an increase in the price of oil, which is almost double what it was 12 months ago, however core inflation is remaining stubbornly subdued.

Complicating the picture further there are also some fairly large divergences across the euro area, with inflation in Germany jumping 0.7% in December to 1.7%, close to the 2% target, whilst inflation in France is still only at 0.6%. This will raise some tough questions for Draghi over the approach of the ECB in 2017 and whether it was too quick off the mark in extending its quantitative easing programme until at least the end of the year. The hawks could well be looking for Draghi to rein in and tighten policy, however with a calendar full of elections across the Eurozone in the year ahead, and double digit unemployment in some areas any tightening still looks to be a long way off. The Euro is trading 0.2% higher versus the dollar, however investors are showing signs of caution ahead of the FOMC minutes released later today.

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