British Pound And FTSE Seek Their Former Glory Via Retail Sales

Retail Sales (APR) (MoM) (8:30 GMT)
Retail Sales (APR) (YoY) (8:30 GMT)
Expected: 0.6%
Expected: 4.7%
Previous: 0.3%
Previous: 4.8%

How Will The Markets React?
The recent highs across the British investment spectrum may be in jeopardy. Stocks, government yields and the pound have all stalled, waiting for the next big turn in the economic tides to mark the end of gains or otherwise reinitiate the until-now resilient trends. Over the past week, all three markets have fallen into lethargic congestion trade on disappointing inflation data. For yields and the sterling, traders were carrying over speculation supporting a possible 50 basis point rate hike from last week?s rate decision. However, as inflation data pulled back from highs from all sectors, the premium for such a hawkish outcome was slowly traded down. At the same time, stock traders were equally concerned with interest rates since the Bank of England?s quarterly inflation report hinted to at least one more rate hike still in the pipeline. As the end of the week approaches, the economic calendar will have one more chance to revive volatility and divert market?s attention from inflation and interest rates. According economists? consensus, retail sales through the month of April rose 0.6 percent. Considering some of this indicators recent volatility, this is a rather conservative estimate - allowing for big reactions on a substantial divergence. Scanning the economic calendar, there are indicators that support arguments for both a disappointing and a better-than-expected retail number. For optimists, a steadily improving employment trend will be at the root of a pick up in consumer spending. In the month of April, British unemployment fell by 15,700 people, extending the positive trend to seven consecutive months. Proving that this is not just a statistic, both the GfK and Nationwide consumer confidence surveys rose to seven month highs. Alternatively, pessimists will have a direct link to sales in the BRC retail sales monitor for the same period. The proprietary report cooled in April to a 4.7 percent annual pace from 6.2 percent. Strong support on both sides - a setup for surprises.
Bonds - 10-Year Long Gilt Futures
The Bank of England?s rate decision provided a hearty dose of market activity, though gilts have been virtually inactive since then. Though the additional 25 basis points raises the return on government debt, it was not the 50 bp that some had expected. This helps to explain the relatively staid price action after the initial shake up as the market priced in the mildly disappointing inflation data. Tomorrow, fundamental traders may have another go at firming 106-27 support with the retail sales report. Wages and consumer spending have acted as the benchmark for overall inflation since CPI and RPI have hit decade highs. However, it may take a big jump in sales to overcome the indirect link to further BoE hikes and technical support.

Cable has steadily trekked down from its highs above 2.0100 and has held in a trending channel ever since. GBPUSD is now near support, however, as price has been hesitant to breach the recent lows near 1.9735, and tomorrow?s UK economic data could send the British pound to do an about-face. Retail sales for the month of April are anticipated to jump 0.6 percent, up from 0.3 percent during the month prior. Such an improvement or an even better release would be quite bullish for GBPUSD, especially amidst its recent bout of weakness, as solid consumption could keep economic expansion on track despite tighter monetary policy. On the other hand, the BRC retail sales report showed a drop from 6.2 percent to 4.7 percent while same store sales fell from 3.9 to 2.4 percent. As a good directional indicator of how retail sales will fare for the same month, the BRC report signals that Friday?s release may actually be disappointing and could drag GBPUSD through support to below 1.9700.

Equities - FTSE 100 Index
London equities held on to gains by midday on Thursday as the oil sector climbed on rising crude prices and amid speculation of more takeover activity. The UK FTSE 100 closed the day up 0.3 percent to 6,579.30 as Royal Dutch Shell surged 3.68 percent higher - their biggest one-day percentage gain in a year - to 18.59 pounds, as crude prices climbed towards $69 a barrel. Meanwhile, BP was up 2.4 percent at 570.5 pence. On the other hand, mining stocks took a beating as the price of copper dropped to a six-week low on fears of slowing demand from China leaving Xstrata down 2.5 percent lower at 26.75 pounds.
While tomorrow?s economic data isn?t likely to be the sole reason for a stock rally, the release of stronger UK retail sales could help propel a boost in the FTSE 100 towards its highs at 6,614.70, as sentiment on retailer shares would turn more optimistic. Sales in the month of April are anticipated to jump 0.6 percent after rising a milder 0.3 percent during the month prior. However, recent data from the retail sector may indicate otherwise, as the BRC retail sales report showed a drop from 6.2 percent to 4.7 percent while same store sales fell from 3.9 to 2.4 percent. As a good directional indicator of how retail sales will fare for the same month, the BRC report signals that Friday?s release may not be pretty and could result in a softer-than-expected reading as well as exacerbate any weakness in UK equities trade.