11 Sep 2018

Market Brief: Britain braces for poor retail sales

Shaun Garrett

Dealing team

Figures released yesterday showed that UK labour market remained steady. The unemployment rate remained firm at a joint 42-year low of 4.3% in the third quarter of 2017.

Today's data releases
  Key levels
09:30 UK retail sales   Support Resistance
10:00 EU CPI inflation
GBP/USD 1.3030 1.3230
13:30 US weekly jobless claims GBP/EUR 1.1070 1.1375
13:30 US import & export price index
Market overview

Figures released yesterday showed that UK labour market remained steady. The unemployment rate remained firm at a joint 42-year low of 4.3% in the third quarter of 2017. The trend in falling joblessness maintained momentum as 59k fewer people found themselves unemployed. Meanwhile, the familiar story of pay growth remaining unresponsive to the historically low level of unemployment stayed intact as headline earnings growth eased back to 2.2% (3m y/y) in September from an upward-revised reading of 2.3% in August. Stripping out bonuses, regular pay growth was unchanged at 2.2%, matching both consensus and our own expectations. Earlier this month, the Bank of England voiced its concern that the diminishing amount of labour market slack had the potential to generate significant wage pressures. These concerns were partly based on survey evidence of heightened expectations for pay growth, with the BoE’s own Agents report highlighting that growing recruitment difficulties among firms had resulted in expectations that pay growth would be 0.5ppt higher in 2018 relative to this year. However, surveys are far from harmonious in their outlook for pay growth, with a recent survey by CIPD finding that roughly 40% of companies were under no pressure to raise wages, with the most commonly cited reason being a recognition among employees that firms would struggle to raise pay awards.

British Prime Minister Theresa May withstood new attempts to force concessions on her blueprint for leaving the European Union on Wednesday, the second day of a parliamentary debate that is deepening divisions over Brexit. All attempts to amend the bill on severing ties with the EU, have been voted down so far. However a debate next month on precisely when Britain should leave, and whether a time should be set at all, is set to test her authority. “We will be leaving the European Union on the 19th of March 2019, and of course there is a lively debate going on in this place and that’s right and proper, and that’s important,” May said during the weekly prime minister’s question time. “We are listening carefully to those who wish to improve the bill and I hope that we can all come together to deliver on the decision that the country took that we should leave the European Union.” The debates are likely to last for weeks on a bill seen by May as crucial to give companies confidence that there will be no major legal changes that affect business when Britain leaves the EU in March 2019.

The U.S. economy delivered a double win for the Federal Reserve in October with an encouraging pickup in core inflation and an unexpected gain in retail sales, further solidifying expectations that policy makers will raise interest rates next month. The consumer-price index excluding food and fuel accelerated on an annual basis for the first time since January, while the overall cost of living rose in line with forecasts. The rise in retail sales last month followed a bigger September advance than previously estimated, according to Commerce Department figures. Together these reports are a reflection of a solid US economic environment, inflation is moving closer to the FEDs core target and a December rate hike now seems fairly certain, Bloomberg are reporting a 92.3% chance of a 0.25% rate rise on the 13th December. 

The day ahead

Today’s UK retail sales for October could well show further weakness after September’s disappointing performance of -0.8%. Expectations are for a figure of -0.5%, though even this might be optimistic with consumers opting to hold out ahead of the potential bargains in November’s Black Friday, or ahead of the pre-Christmas sales in December. Euro area final CPI inflation data for October is released this morning at 10am: expectations are for inflation to be confirmed at 1.4% a slowing from 1.5% seen in September. Core prices are expected to be unrevised at 0.9%, a number that isn’t expected to inspire confidence that the ECB will be in any hurry to consider any sort of departure from the current time line for the pulling back from current levels of stimulus.

Thought of the day

With Christmas just 39 days away, retailers and supermarkets are in full festive flow with a swathe of festive themed adverts and instore promotions. One retailer who is making a left field approach to the traditional Christmas is Asda. The American owned supermarket giant is set to launch its Christmas dinner pizza with toppings of chicken rather than turkey, roast potatoes, Brussel sprouts - then it's all smothered in cranberry sauce! While the Investec Dealers applaud innovation and ‘out of the box’ thinking, we feel that Brussel sprouts on a Pizza may be a step too far! Here at Investec we strive to remain at the forefront of what we do and we have recently began producing bespoke FX Roadmaps for our clients – an interactive tool that showcases how changing FX rates may impact your levels of FX cover. If you’d like to see how this would look like for your business, give your Investec dealer a call today.

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