UK retail sales fell sharply in July

OVERNIGHT

Asia-Pacific equity markets are down this morning following falls in US and European markets yesterday. A gauge of Asian stocks has now fallen for six sessions in a row and is on course to record its worst weekly performance out of the last eight. Ongoing concerns about the situation in China and concerns that global interest rates could stay higher for longer were cited as being behind the moves. In Japan, annual CPI inflation in July was unchanged from June at 3.3% and inflation excluding fresh food and energy prices rose to 4.3% from 4.2%. That may support the case for a shift in Japan’s ultra-easy monetary policy stance.

THE DAY AHEAD

Just released UK retail sales for July showed a monthly fall of 1.2% and 1.4% excluding fuel purchases. That was much weaker than consensus expectations but close to our own forecast of a 1.5% drop. Monthly retail sales data can be very volatile and today’s fall comes after a series of small monthly rises in the first half of the year. Moreover, the unusually wet weather in July may have held back spending. But today’s data may be a sign that interest rate hikes are really starting to bite. Nevertheless, market pricing suggests that another interest rate hike by the Bank of England in September is still seen as very likely.    

The rest of today’s data calendar is very light. The Eurozone CPI for July is a second reading that is not expected to be revised from its original estimate. That showed annual headline inflation at 5.3% down from 5.5% in June and only half of last October’s recent peak inflation rate of 10.6%. However, core inflation was unchanged from June at 5.5%. 

Both measures are still well above the European Central Bank’s 2.0% inflation target, supporting market expectations of another interest rate hike by the ECB next month. Even if there is a small revision to the data today, that seems unlikely to have much impact on markets that are now be more focused on the August flash CPI release, due on 31st August, two weeks before the ECB policy update.

The only other data release today is Eurozone construction output. This is never a market mover but nevertheless should be of interest because, as a highly interest sensitive sector, it is an indicator whether rates are really starting to bite. The last reading for May saw a minimal annual rise of 0.1%.

Next week is scheduled to get off to a quiet start. The only data of note early Monday is the UK Rightmove house price index for August. The July reading was down 0.2% and only up 0.5% from a year ago. Given the trend in interest rates, the news may not be any better this month. 

MARKETS

US longer-term bond yields saw another sharp rise yesterday, although they have seen some slippage overnight. UK and Eurozone yields also rose with longer-run gilt yields touching new highs for the year. Sterling is down this morning with the larger than expected decline in retail sales seemingly adding impetus to the drop.