UK Retail Sales set to slip back again

Markets in Europe underwent another positive session yesterday with the CAC 40 joining the FTSE100 with a new record high, despite some afternoon weakness caused by a hotter than expected US PPI report.

Some hawkish comments from Cleveland Fed President Loretta Mester that there had been a compelling case for a 50bps rate hike at the last meeting prompted another bout of US dollar strength and higher yields. Her comments also raised the prospect that she may not have been alone in thinking along those lines.

Next week’s Fed minutes could shed some further light on that thought process, but her comments also raise the question that even if there wasn’t a compelling case for a 50bps move back then amongst other members, surely the data since then suggests that there might be a stronger case for a 50bps move in March. This was reinforced further by St. Louis Fed President Bullard who suggested a 50bps hike in March might be appropriate given the strength of recent data.

These comments as well as yesterday’s PPI report weighed on US markets which finished the day sharply lower as the US dollar pushed higher, along with yields.

This looks set to weigh on European markets as they get set to open later this morning.

The end of last year saw retail spending in the US and the UK experience an end of year slump that saw a sharp slide in consumer spending, although UK consumers have been more adversely affected with a much bigger squeeze on their incomes, due to higher energy prices driving much higher levels of headline inflation.

While spending in the US saw a huge 3% rebound in January in figures released earlier this week, it’s highly unlikely that we’ll see anything like that in today’s UK retail sales numbers for January. In November and December, UK retail sales saw sharp declines of -0.5% and -1% respectively, with the poor performance in December all the more surprising given that many UK retailers announced better than expected trading numbers in the lead-up to Christmas. This had raised hopes that, despite the rail and postal strikes that consumers had still managed to push a rebound in spending.

One of the more notable features of the December data was that while sales volumes were predominantly lower, the amount of money being spent held up, reinforcing the fact that consumers are still spending money, but they are being more discriminating about how they spend it. Over the previous 3 months volumes fell by -5.7%, however the value of goods saw a rise of 3.6% excluding fuel. That tells you all you need to know about the effect that higher prices have had on spending patterns. With inflation set to remain sticky in the coming months the only silver lining would appear to be that wages are starting to play catch up, however that presents risks of its own.

On another pessimistic note, consumer confidence numbers in January fell back sharply to -45 as people got a dose of the January blues, as consumers looked to pay off pre-Christmas spending.

On the plus side we could well see a significant uplift in travel and leisure spending as more people book holidays. In their recent travel updates airlines have recorded decent demand for seats as well as holiday packages, which should be reflected in the overall numbers. Expectations are for a decline of -0.3%.

EUR/USD – Has slipped below the 1.0650/60 area and could weaken further towards 1.0610 on the way towards the 1.0480 level and January lows. A move above 1.0800 targets a move towards 1.0920.

GBP/USD – Continues to slide lower towards the 200-day SMA which is the next key support area at 1.1930/40. Below 1.1930 retargets the 1.1835 area, while we need to see a move through 1.2300 to reopen a move towards 1.2400.

EUR/GBP – Has edged above the 0.8900 area. A concerted move above 0.8900 retargets the February highs at 0.8960. Support remains back at the 50-day SMA at 0.8780/90, and the 100-day SMA at 0. 8740.

USD/JPY – Continues to ratchet higher after breaking above the 50-day SMA earlier this week and has moved above the 134.50 area. A move through 134.50 has the potential to open up a return to the 200-day SMA at 136.70.

FTSE100 is expected to open 20 points lower at 7,992.

DAX is expected to open 105 points lower at 15,428.

CAC40 is expected to open 37 points lower at 7,327.