Friday 20th June,2008

Unforeseen Rise in UK Retail Sales Leads to Sterling Rebound

A report released by the Office for National Statistics on Thursday showed a somewhat unexpected 3.5% rise in retail sales volumes during May, the fastest monthly increase on record and in stark contrast to the forecasted 0.1% downturn. Year-on-year sales were up 5.4% with the growth driven by sales of food, despite soaring food prices and clothing, a sector in which recent declining sales had forced severe discounting amongst retailers. The British Retail Consortium attributed rising sales on a period of good weather and whilst analysts differed in their explanations, most were in agreement that the figures do show a higher level of resilience in the UK consumer than had previously been expected.

Although it is widely known that the BOE places greater importance on business surveys, the ONS is still significant as it demonstrates that rising food and energy prices and problems in the housing market have yet to fully impact on consumers. Today’s report could provide further support for the MPC to keep interest rates on hold for the time being and comes on the back of the governor’s increasingly hawkish comments in reference to rising inflation. It is of course important to recognise that yesterday’s data is just one stat on one month and so must be taken in context.

The reaction in the markets saw U.K government bonds fall whilst sterling appreciated against the euro and the dollar. EURGBP dropped under the 0.79 level while GBPUSD traded higher to sit above 1.97.The dollar strengthened against the Euro and currently trades around the 1.55 level. London equities initially reacted positively to the retail sales figures however the FTSE still ended the day down 0.84%, reaching its lowest level since March. Despite a report showing a 5,000 fall in the number of individuals filing new claims for unemployment benefits, stocks initially slipped for a third consecutive day on Wall Street. Investors focused on worse than expected manufacturing data as the Philadelphia Fed general economic index dropped to -17.1 representing a clear decline. However persistent anxieties over financial stocks were overtaken as a drop in oil prices pushed the Dow Jones 0.28% higher on the day.

In Europe political leaders attended an EU summit on Thursday aiming at tackling the crisis caused by the Irish electorate’s rejection of the Lisbon Treaty. Speaking before the summit, the German Chancellor Angela Merkel argued that although extra-concessions should not be made to Ireland, the Irish government should be given time to consider its next move. Merkel stated clearly that, “A two-speed Europe is not the way forward.”

News from China that state subsidies on oil are to be significantly cut and retail petrol and diesel prices increased by 18% as of today, brought chaos at forecourts and prevented oil from breaking the $140 dollar mark yesterday. Traders had at first appeared content to wait for the outcome of this weekend’s summit in Jeddah however reports of a fresh set of rebel attacks on Nigeria’s oil infrastructure threatened to push oil to a new record high. NYMEX crude eventually closed the day at $131.93.

Friday sees the release of Germany’s Producer Price Index for May whilst the UK markets are awaiting further announcements regarding the make-up and remit of the Bank of England’s new financial stability committee, as detailed by the Chancellor on Wednesday. Tensions between the Treasury and the Bank over Sir John Gieve’s replacement as deputy governor will also remain on the agenda over the coming weeks.

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