How Did the Markets React?
The
better-than-expected release of BRC retail sales gave UK markets a bit
of a pop as the British pound immediately jumped while 10-year gilts dipped and
the FTSE 100 edged higher at the respective market openings. A breakdown of the
data showed that food sales were robust and that clothes and footwear sales
picked up just before Christmas, in line with previous reports that shoppers
left their holiday shopping until late in the season this year. However, durable
goods sales were still mixed and largely discount driven. Nevertheless, the BRC
figures include few Internet based sales, indicating that the official figures
could be even stronger. Overall, the strong December retail sales performance
fueled some further speculation of a Q1 rate hike by the Bank of England.
However, given recent cooling in lending and house prices, the central bank may
opt to keep rates on hold until mid-year, barring a surprise jump in wage
growth.
Bonds – UK 10-Year Gilts
Prices on 10-year gilts started out
the day lower with the help of strong retail sales reports out of the
UK, fueling expectations of a BOE
hike in Q1. However, price quickly bounced from the 93.80 level to as high as
94.16, leaving yields to tumble two basis points to 4.761%. With the BOE
anticipated to keep rates on hold at their next monetary policy meeting on
Thursday, prices could continue to gain as data out of the UK has been
mixed as of late, leading markets to believe that the central bank may stay on
hold throughout Q1.
FX –
GBP/USD
Cable received a small boost during
the Asian session on the release of BRC retail sales, which saw same store sales
rise 2.5% from last year while total sales jumped to 4.4%. Within an hour of the
retail sales report, GBP/USD gained more than 40 points to 1.9436. Subsequently,
price held fairly steady near resistance at the 12/18 low of 1.9432 on a sparse
economic calendar and light trading. Cable movements may be limited ahead of the
Bank of England’s interest rate announcement on Thursday, when the central bank
is expected to keep rates on hold at 5.00%.
Equities – FTSE 100
Index
Miners led the FTSE 100 0.4% higher to 6,215.7 today as
metals prices firmed. After a three-day slide, copper rose 1%, sending BHP
Billiton up 2.1% to 908 pence while Xstrata gained 2% to 23.61 pounds.
Meanwhile, strong UK retail
sales did little for the UK’s largest clothing seller, as
shares of Marks & Spencer Group Plc dropped 1.9% to 711.5 pence. The company
reported revenue growth of 5.6 percent at stores open at least a year for the
third quarter, missing analyst estimates. Oil giant BP fell 2.6% to 538½ pence
after a worse-than-expected trading update. Overall production in the fourth
quarter of 2006 is expected to be around 3.82 million barrels of oil equivalent
per day - significantly lower than in the third quarter.
