January's retail sales disappointed against expectations, with just a 0.1% monthly rise in retail sales volumes recorded following the (revised) 1.4% mom drop recorded in December. That compared against a 0.5% market consensus (Investec forecast 0.3%) and left the year-over-year rise in retail sales volumes pretty steady at 1.6%, with it having stood in the range 1.4%-1.6% yoy for three months. The recent retail sales figures quite clearly point to UK households having faced a tough time over the past few months. Although we do not expect an overnight improvement, we do expect this picture to improve as 2018 progresses. Indeed, we suspect inflation will moderate relatively rapidly through 2018 with CPI inflation coming down from 3.0% in January 2018 to a little above 2% in the final three months of the year. Alongside something of a pick-up in pay growth and potentially further gains in employment, this should support an improvement in consumer spending momentum.

Following Mark Carney’s recent comments at February’s Bank of England meeting, British households are preparing for more doom and gloom about their finances as most expect borrowing costs to rise again within six months after the BoE raised interest rates in November. Data company IHS Markit said its Household Finance Index, a monthly gauge of financial well-being, fell to a seven-month low of 42.2 from 42.9 in January. Conducted over six days starting on February 8, the day the BoE said it was likely to raise rates sooner and by more than it previously thought, the survey showed 60 percent of households expected a hike within six months, up from 45 percent in January.

Meanwhile, Rightmove reported that the average price of a UK residential property coming on to the market rose by more than £2,400 between January and February to just over £300,000 amid evidence of record level of house-hunting activity. The website, which tracks 90% of the UK property market, said the national average asking price for a home had increased by 0.8% during the past month, following the 0.7% rise it reported in mid-January. It comes as chartered surveyor firm e.surv's new mortgage monitor for February reported a positive start to the year for the UK mortgage market, with an increase in the number of small deposit borrowers being approved.

Equity markets continued their global recovery last week and overnight in Asian markets. Markets quickly shrugged off any concerns that rising US inflation might lead to a faster pace of monetary policy normalisation following firmer than expected US CPI inflation figures released mid-week. The US dollar reaction was also not what one might have had expected following the CPI figures, with the USD having broadly weakened since. However, bond markets have appeared less relaxed about the prospect of more aggressive Fed tightening, with 10-year US Treasury yields rising to 2.93% in the aftermath of Wednesday’s inflation data, their highest standing since January 2014, though have subsequently retraced to 2.875% .The minutes of the Fed’s last policy meeting, held amid the equities tumble on Jan. 30-31, are due on Wednesday. Besides the outlook on rates, markets will be keen to see what, if anything, the Fed makes of the gyrations in markets.

The week ahead

Relatively light on the FX calendar today with Chinese New Year and President’s day in the US. Carney is speaking this afternoon, but is not expected to discuss monetary policy until Wednesday at the Treasury Select Committee alongside fellow BoE rate-setters Broadbent, Haldane and Tenreyro. The EU releases construction output data at 10am this morning, followed by ZEW survey tomorrow at the same time. Data releases pick up mid-week with a flurry of ‘flash’ PMIs out from France, Germany and the EU. The UK then releases labour market data on Wednesday, where investors will be keeping a close eye on average earnings, followed by the second estimate of GDP on Thursday. However, the main event is Wednesday evening which is the release of January’s FOMC meeting minutes. Later in the week the UK and Germany release GDP before the releases final EU CPI inflation figures on Friday. 

Thought of the day

Across the pond the Americans are enjoying a long weekend with many off today for Presidents’ Day. The day is meant to celebrate George Washington and all the presidents of the U.S. Many see Washington as quite a serious and stern figure but he was actually a man who loved parties spending many an evening dancing late into the night at balls, cotillions, and banquets. I wouldn’t be surprised if Americans took advantage of the long weekend to do the same with today’s data calendar unsurprisingly light as a result. The market is instead looking ahead to Wednesday’s FOMC minutes which could prove quite telling as a lot recent FX and wider market moves have been surrounding the timing and speed of the Fed raising interest rates. If you’d like to chat through this and its potential outcomes, give your Investec dealer a call on 0800 055 6339.