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Surge in UK Sales Leads Cable, Equities Higher

Thursday, 16 November 2006 13:06:55 GMT  |  Terri Belkas, Currency Analyst

UK Retail Sales (OCT) (08:30GMT; 4:30EST)
                                MoM       YoY                        

Actual:                   0.9%       3.9%

Expected:             0.3%       3.2%

Previous:              -0.4%     3.0% (R)

 

How Did the Markets React? 

 

While all of the UK markets showed a rapid reaction to today’s retail sales report, FX markets showed the most intense response while equity markets absorbed the data throughout the trading session. Fixed income markets, on the other hand, had a more limited reaction, but it was fundamentally “correct” nevertheless. Retail sales in the UK surged 0.9% in the month of October, bringing the annual rate to hit a 10-month high of 3.9%. Lower prices in stores, weaker gasoline costs, and a strong labor market led consumers to buy more in department stores and over the internet. The resilient housing market is also giving consumption a boost, and the data backs the Bank of England’s claim yesterday that consumer spending will help the economy expand by its strongest annual pace in two years near 3.0%.

 

Bonds – UK 10-Year Gilts

Although UK gilts weakened slightly following this morning’s retail sales report, the impact on price and yield was minimal as policy action by the Bank of England is not likely to occur until 2007. Consumer spending surged 0.9% in the month of October, backing the BOE’s recent claims that consumption will keep the economy on track to expand near 3.0%. Volume increased with gilt selling, upping the probabilities of higher yields. However, with no economic data due out of the UK until next week’s Q3 GDP report, gilt price action will likely depend more broadly on US data.

FX – GBP/USD

 

Cable verticalized 50 points upon release of UK retail sales data, however, the 1.8900 level proved to provide too much resistance to make a solid break above the figure. FX traders were hesitant to make more substantial bets on the pair ahead of US CPI and TICS data later in the morning. Retail sales in the UK surged 0.9% in the month of October, bringing the annual rate to hit a 10-month high of 3.9%. The data underpinned the Bank of England’s statement yesterday that consumer spending will help the economy remain on track to grow close to 3.0% this year. However, the gains did little to offset Pound’s 200 points of losses over the past week, as the BOE is unlikely to consider policy action until well into 2007.

 

Equities – FTSE 100 Index                                                               

 

UK equities worked their way higher this morning as retail sales in the country surged far higher than expected. Consumers spending rocketed 0.9% in the month of October, bringing the annual rate to hit a 10-month high of 3.9%. The resilient housing market is still giving consumption a boost, and the data backs the Bank of England’s claim yesterday that consumer spending will help the economy expand by its strongest annual pace in two years near 3.0%. The report also bodes well for sales during the Christmas season, a crucial time of year for retailers to make profits. However, the primary driver of the UK’s benchmark index, the FTSE 100, was National Grid. The index average rose 0.1% to 6,238.1 as the energy network operator announced higher profits and plans to de-merge its mobile phone mast business and return $1.9 billion to shareholders. Shares of National Grid jumped 5.1% to 734p. Cadbury Schweppes also gained 2% to 640p amid talk that a private equity group was lining up a takeover of the confectionary group.

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