[B]UK Retail Sales (MoM) (JUN) (08:30 GMT; 04:30 EST) UK Retail Sales (YoY) (JUN) (08:30 GMT; 04:30 EST)[/B]
[B] Expected: 0.3% Expected: 3.5%
Previous: 0.4% Previous: 3.9%[/B]
[B]How Will The Markets React?[/B]
During a heavy week of event risk out of the UK, retail sales growth is anticipated to soften in the month of June to an annualized rate of 3.5 percent - a seven-month low. Such a decline would not be entirely surprising, especially as shoppers may have been deterred by three 25 basis point hikes by the Bank of England since the beginning of the year and as crude oil prices continue to mount above $70/bbl. In fact, UK retailers such as Marks & Spencer said today that domestic sales increased at the slowest pace in six quarters, citing the detrimental effects of interest rates and the fact that June was the wettest since records began in 1914. On the other hand, the British Retail Consortium reported that revenues rose 3 percent in June from a year earlier - the sharpest improvement since March and up from 1.8 percent gain in May - as stores implemented heavy discounting of non-food goods. Nevertheless, the impact of this report on bond and FX markets may be dulled, as Bank of England Deputy Governor Sir John Gieve said recently that if, as a result of higher interest rates, “we saw a bit of a switch into stronger investment and exports and slightly weaker consumption, that would be no bad thing.” Clearly, the Bank of England is willing to take the risk of damaging some aspects of growth in order to keep inflation in check, raising the risks of policy tightening regardless of a slowdown in consumption growth.
[B]Bonds - 10-Year Long Gilt Futures[/B]
Gilts have bounced back again as the choppy trade of the last few weeks continues. Given the reluctance to extend beyond the 104.20 level, some downside risk remains. Daily technicals have signaled the potential for fading strength and a dip back towards the 102.90 contract low. However, the release of weak UK retail sales on Thursday could give Gilts a boost up to 104.38, and could indicate a more substantial bid tone for the contracts in the near term. Nevertheless, the level may serve as resistance and block big moves higher, reiterating the downside risks.
[B]10-Year Long Gilt Futures (Intraday Chart)[/B]
[B]FX - GBP/USD[/B]
Once again, GBP/USD has hit new 26-year highs of 2.0548, despite the fact that the minutes of the Bank of England?s July meeting revealed that the decision to hike rates to 5.75 percent was not a unanimous decision, but was instead a 6-3 vote. While the markets generally expected that another rate hike wouldn?t occur until September, the meeting minutes only reiterated that sentiment, especially as the monetary policy committee will likely want to wait for the Quarterly Inflation Report to be released on August 8th before considering hiking again. Looking ahead, Thursday?s release of retail sales figures for the month of June provide some downside risks for the British pound, as consumption growth is anticipated to slow. The impact on the currency may only be brief, however, as rate outlooks in the near term will have less to do with the status of the retail sector and more to do with broader inflation pressures. As a result, the major uptrend for GBP/USD may continue to target 2.0600.
[B]GBP/USD (Intraday Chart)
[B]Equities - FTSE 100 Index[/B]
UK stocks declined by the most in more than a month, as the benchmark FTSE 100 Index retreated 1.4 percent to 6567.10. Anglo American Plc, the world’s second-biggest mining company, led declines as shares fell 3.9 percent to 3100 pence amidst broker downgrades on mining stocks and as concerns over sales outlooks hurt the sector as a whole. Meanwhile, Experian Group Ltd. slid 3.1 percent to 591 pence as the British pound’s push to fresh 26-year highs hurt sentiment on export-dependent companies. Tate & Lyle, the maker of the sweetener Splenda, slipped 2.8 percent to 583.5 pence after the company sold its European starch unit for a 20 million-pound loss and said it expects profit from continuing operations to fall.
The FTSE 100 is nearing trendline support at the 6,550 level, and if UK retail sales prove to be disappointing in June, retail-oriented shares could push the UK benchmark index even lower to test 6,500. However, large declines like we saw on Wednesday tend to be followed by retracements higher, so even if the UK retail sales report proves to be somewhat soft upon release, the FTSE 100 could stage a mild rebound.
[B]FTSE 100 Index (Daily Chart)