Heatwave gives UK Retail Sales a boost, as ECB rate cut reach a floor

There has been little respite for the UK economy in recent weeks, however, the consumer continues to be one of the last pillars of support protecting the UK economy. Sales excluding fuel were less than expected in June, they rose 0.6% on the month, less than the 1.2% expected by economists. Although sales were weaker than expected, they picked up compared to May, when they fell  2.9%.

The hard retail sales data was weaker than the BRC retail sales data for June, which suggested that sales would rise at a robust 2.7% YoY rate. Thus, there are some mixed messages about the health of the UK consumer.  The Office for National Statistics noted that although sales were weaker than expected, sales rose across all of the main sectors in June. Non-food retail sales rose 1.7%, food sales rose 0.7% and fuel sales rose by 2.8%.

Heatwave sales propped up retail data

The heatwave helped to boost supermarket sales, with supermarkets reporting increased sales of drinks. The rise in fuel sales was driven by people venturing around the country to enjoy the sunshine. Although there is an economic malaise around the UK, the consumer remains a pillar of support, as wage growth continues to prop up spending, and hopes for an interest rate cut next month rejuvenates consumer activity.

Business pessimism remains weak

The ONS also reported its Business Insights and Impacts on the UK economy survey this week, which included some interesting insights. Economic uncertainty remains the number one challenge affecting trading businesses in July, with the cost of labour a big challenge for companies with 10+ employees. Nearly 20% of businesses reported that they expect their turnover to decrease in August compared to July. Although part of this is seasonal, turnover often drops in the peak of summer, it does suggest that business confidence is low, and pessimism is rising, which adds to the sense of UK economic fragility.

The pound is weaker on Friday and is on track to be the weakest performer in the G10 FX space this week. So far this quarter, the dollar is broadly stronger, and the pound is the second weakest in the G10 FX space, as political and economic woes weighs on the UK currency, along with a decline in bond yields.

European stocks weighed down by reduced ECB rate cut hopes

Although the S&P 500 and the Nasdaq reached fresh record highs on Thursday, momentum has not been kept up, and European stocks are weaker at the end of the week. A more hawkish than expected ECB has soured the mood for European equities, after Christine Lagarde quashed hopes that the ECB will cut rates again in September. The interest rate futures market is pricing in a 15% chance of a rate cut in September, down from a 42% chance before Thursday’s ECB meeting. There was also some earnings disappointment, with LVMH reporting weaker sales, as consumers continued to shun LVMH’s luxury pricy brands, however, its share price is rising on Friday, as hopes rise for a turnaround in the future. 

This is why European yields are rising again on Friday and yields in France and Germany are higher by 14 and 15bps this week, suggesting that the market is sensitive to the potential floor in European rates at 2%.

Clarity about trade risks, boosts Japan rate hike hopes

This week there has been some clarity around trade risks, for example, Japan and the US reached a trade agreement with a 15% tariff rate. This has increased the chances of a Japanese rate hike later this year. There is now a 40% chance of a rate hike in October, up from a 25% chance earlier this week. This has helped the yen to pick up slightly, however, momentum is on the side of the dollar right now, which is limiting USD upside.

As we lead up to the weekend, hopes will be high for news about an EU/US trade agreement before next Friday’s deadline. Reports suggest that a 15% rate across multiple sectors is one the cards. However, there has been no confirmation from the US side, and we still do not know what will happen with pharma. Thus, sentiment towards European assets could be fragile as we lead up to that August 1^st tariff deadline. However, the euro is broadly higher this week, the risk could be to the downside on Monday, if there is no good news on tariffs this weekend.

US stocks could drift higher

US stock futures are mildly higher, and have been calmed by 1, the better tone to tariff negotiations and 2, conformation that President Trump won’t sack the chair of the Federal Reserve, Jerome Powell. Thus, for US stocks, momentum is on the upside, and US stocks are set to outperform European stocks this week, bar the FTSE 100 which has been the top global performer this week.