UK Retail sales missed their mark, printing at -0.8% versus -0.1% eyed putting pressure on the pound in early London trade. The fall was the sharpest decline since April and raised the possibility that UK GDP may contract once again in Q4 of this year.
The fall in consumer spending was driven primarily by drop in sales of food, clothing and footwear. Headline volumes rose only 0.6% on a year over year basis suggesting that the overall trend is flat. Food sales which make up 41% of overall sales led the drop falling by 0.6% on the month.
Yesterday’s weak Retail Sales data is the second disappointing economic reports this week, after jobless claims ticked up yesterday painting a bleak picture of the UK economy that was reaffirmed by Governor Mervyn King. He noted that UK may once again contract in Q4 of this year and today’s weak Retail Sales results confirm that view.
Yesterday’s euro area Q3 GDP figures, which showed that the currency zone relapsed into a technical recession for the second time in four years, added to the generally downbeat tone to this week’s European data. The 0.1% q/q decline was in line with market expectations and there was some slight upside news from the French and German GDP prints which indicated that both economies grew during Q3, albeit tepidly. However, Monday’s softer-than-expected German ZEW survey for November, as well as Tuesday’s equally disappointing euro area industrial production figures for September, suggest that activity in the region is set to soften further into Q4.
Today sees US industrial production data for October. After softening during Q3, Lloyds TSB expect output to rise by just 0.1% m/m. The background survey was carried out before the full impact of Hurricane Sandy, although some sectors may have started to cut back on production in the run-up to Sandy coming ashore. Other releases which span the most severe impacts of the storm such as the Federal Reserve Bank of Philadelphia’s general economic index, which fell from 5.7 in October to a much weaker-than-expected -10.7 in November, and initial jobless claims for the week ending November 10, point to a marked downward impact on activity. However, the Empire Manufacturing Survey delivered a stronger outturn than the market anticipated. In any case, we expect any adverse impact of Sandy to unwind over the coming months on the back of subsequent clean-up and rebuilding activity.
Cable fell to a session low of 1.5825 in the aftermath of the release, but recovered somewhat to stabilize at 1.5850. Still the pair remains under heavy selling pressure especially after yesterday’s comments by Governor King that UK would need to see a depreciating currency in order to improve its competitiveness. The pair may consolidate at these levels as it has now reached its 200 day moving average, but any further sell off in risk could prompt a test of 1.5800 as the day proceeds.
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